Currency Prices – The Top Five Things Which Move It
Just quickly following up with a question from a subscriber asking what the biggest drivers are of currency prices in the short and the longer terms. First of all thanks for the question.
RECOMMENDED READING TO FURTHER HELP YOUR TRADING:
Now looking at this there are basically five key drivers that influence currency prices and we’ll start going through them in the order of importance.
Firstly we have monetary policy, now this is by far the biggest influence of currency prices in both the short and the longer term and remember that central banks are basically in charge of saving interest rates and changing the money supply and both of these two things are critical movers for currency values.
Now when looking at monetary policy there’s a couple of things that you need to focus on, such as the current rate cycle that the bank is in. For example are they currently in a hiking or a cutting cycle or are they neutral and apart from that where are the markets currently expecting the rate off to go from here?
Other things to focus is the current theme or focus points that the bank is concerned about so for example if the bank is concerned about inflation, we know that inflation data will be important for the markets, might be market moving.
Or if the bank is concerned about trade escalations and of course that will something that you need to factor into your analysis by determining the way forward for the bank and of course the rates.
Now also paying attention to the banks forecast and predictions will be important as their view of where the economy is going will important once we start seeing how the actual economic data either confirms or dis-confirms what the bank has been projecting.
So always be prepared for things like policy meetings of course not every meeting, will be important and market moving but if you do your research and follow up on what the markets are expecting by following us in the Forex terminal of course, you’ll know which events are highly anticipated and which ones are expected to be more of a snooze fest so to speak. Second one economic data.
So the second key driver of course is all of the economic data but as we’ve mentioned above as well, just like monetary policy, not every single data point will be important all the time, exceptions might be when when markets aren’t really expecting any fireworks from events, maybe because it’s just not that important.
So expectations for events will normally determine the type of impact that we can expect from them and then of course when the actual changes significantly differs from what the consensus was expecting.
So also keep in mind that very important U.S data due to the importance of the U.S dollar and the U.S economy can of course move all other currencies if we see strong enough reactions in the dollar. So always pay attention to tier one data points from the U.S as an important one to watch across the currency space, but again only if expectations point to a highly anticipated event. Main politics. If you talk to traders who’ve been trading for many years you’ll often hear them say, that politics have become a more and more important topic recently.
Especially for traders to be able to comprehend how prices are moving. So the current era of trade wars and trade deals and Brexit and U.S China tensions has certainly changed the trading landscape and given traders a whole new dimension to focus on in terms of politics and geopolitics. So it’s important to stay on top of the major political themes that might be driving the markets at any given time.
Of course just like with monetary policy, just like with economic data, not everything that is mentioned by a politician about an important theme like Brexit for example, will be important all the time and the market won’t be selling or buying a currency every second of every day due to those political issues. So the most significant time that these elements will be a focus for the market is when there’s a fresh catalyst, a fresh news, fresh developments that the markets, that basically gives the markets reasons to price in a positive or negative repercussions from that.
Apart from things like trade wars and trade deals, also keep track of very important elections, especially in the U.S and other major economies. Different candidates can of course have various outlooks regarding business and fiscal policy and any news showing that a candidate that has for example, a good view that’s expected to be good for business will of course be a positive catalyst and vice versa as well. So definitely something to always keep in mind.
Then looking at your cross-asset class correlations or intermarket analysis. Another big factor to keep in mind for currencies. This can be one of the biggest and most influential sources of short-term sentiment in the markets, so this is why we track the performance of all major asset classes throughout the trading day, including equities, commodities, bond market and of course currencies.
So you can’t just look at currencies in a vacuum, because all asset classes are connected and interconnected and if you know which correlations to look for, it can really open up a lot of opportunities in the market on a daily basis, so always make sure to know what the major correlations are amongst the asset classes so that when opportunities arise, you know exactly how to position yourself ahead of time and obviously capitalize on those moves.
Quick example to be thinking of equities and the importance for the overall risk sentiment and how it will likely affect your higher rate currencies and your safe haven currencies, thinking of things like commodities, like oil and how it can most likely affect petro-currencies like the CAD the rouble, the market cedra, just some examples. And then of course number five the technicals.
Now this is another important factor that we need to consider. It is arguably the least important factor from a currency valuation point of view, but it does play an important role and can impact prices in the short term. So think of things like key support and resistance levels. Not only key swing points in the charts alone, but also key psychological price levels on the charts or think of major higher time frame trend lines, being broken or taken out.
These are all things that can impact price moves in the short term, because a very large portion of the market, obviously places a lot of focus on these things and we can see price action being affected, when we get closer to these types of levels. Also think of these levels in terms of how they are significant from stock loss placement right?
So if you break above a key resistance zone, above a key psychological price point. Once that’s broken, there is a price action expectation with continuation to the move to the upside, there’s a lot of stops that will be taken out at those particular levels, so always something to keep in mind. Always be mindful of those key technical areas and levels in the charts where the bulk of traders might have their stops as a break of those key areas as we said, can see some stock runs being taken up. So overall that is the five biggest drivers for currency prices in both the short-term and the medium-term.
If you just take a quick look at the way these influences currency prices in the short and medium term will give you some context as to why prices move sometimes and of course, if you go through the market and there is absolutely no catalyst.
None of these five elements are in play and the market moves, that is also possible right? So there’s not always gonna be a specific reason for the market to move up or down.
Sometimes the market just moves and we need to be okay with that uncertainty as well but these five points should give you a very good framework of why currency prices are moving so that you can establish why prices are moving a certain way, and why they’re acting a certain way and of course how you can take advantage of those particular catalysts.