The financial market in the UK is an essential hub for many global investors. Its advanced infrastructure supporting electronic trading has become a leading destination for retail and high-net-worth traders, especially online forex trading.
Let’s look at the critical factors that affect the market.
Forex traders should watch metal prices, especially those affecting steel. A healthy global economy means steady demand for these products. As a result, manufacturers will likely need to increase their prices over time, which may cause consumers to purchase fewer goods and start looking for other options. Investors can expect higher price volatility as people look for new investments that offer better value if this happens.
The economic performance of these two regions is also a critical factor that traders should closely monitor. According to Trading Economics, the Eurozone’s economy represents about 20% of the world’s gross domestic product (GDP), while the US accounts for 25%. Anything in these areas will affect global trade and investment flows, undoubtedly impacting exchange rates and markets worldwide.
As one of the most widely used indicators, this metric gauges consumers’ optimism or pessimism. If consumer confidence increases, people tend to spend more money on goods and services, leading to higher inflation rates that eventually push up interest rates. According to Investopedia, this will prompt investors to take their money out of commodities and put it into higher-yielding assets. As a result, the value of the currency in question will decrease compared to other currencies.
Governments in countries with robust economies often ask their central banks to implement policies that can affect short-term interest rates, which will drive demand for certain currencies over others. For instance, when authorities increase rates, traders usually flock to historically low-risk investments like the US dollar. Meaning that if you’re trading another currency, your investment may suffer losses as people start selling off the local currency in favor of dollars or other more stable fiat currencies.
However, if central bank officials decide to do the opposite and cut rates, the currency’s value is likely to rise. Meaning that if you’re holding low-yielding money and interest rates fall, your investment will likely increase in value as investors start selling dollars and buying other currencies.
Oil prices affect the entire world economy since oil is considered a critical commodity. As demand increases, traders will likely see an increase in the value of currencies for countries that produce oil like Russia and Norway. On the other hand, higher costs might make consumers buy fewer goods and services, eventually lowering inflation rates.
The CPI measures the average change in consumer goods and services purchased by households over time. Data is collected at all levels of an economy, including countries, states, metropolitan areas, and cities. For example, the UK has three different CPIs that measure London prices, all subdivisions within Great Britain and Northern Ireland. If the CPI shows a high inflation rate, investors may want to consider investing in a currency with a low value since they can purchase more units using their fiat money.
The PPI represents wholesale prices for finished or semi-finished products sold domestically. In other words, it shows changes in the selling prices of goods. It is also important to note that this metric is not affected by direct cross-border transactions since the PPI only measures price changes for particular components used in domestic production. For example, if oil prices increase, producers may need to use more oil in their production process. Meaning that the PPI will register an increase even though there was no change concerning consumer spending.
As you begin trading forex, it’s crucial to understand how these factors impact currency prices. By keeping track of economic indicators like employment figures or inflation rate changes, you’ll be able to plan your next move better than ever before. To test your knowledge and start your trading journey, navigate here.