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GDP, Trade Balance & Currency Markets

Learn forex scalping. Economic growth of countries can also have a big impact on the overall currency market sentiment besides the interest rates. United States is the largest economy in the world. US economy is the key factor in determining the global currency market sentiment. US economic growth figures affect the major currency pairs like EUR/USD, GBP/USD, CHF/USD and JPY/USD.You can trade forex news.

Discover a revolutionary new forex robot. A strong economic expansion coupled with a healthy labor market tends to boost consumer spending in the country. This helps in selling the stuff produced by the local companies and businesses.

A country with a strong economy is in a better position to attract foreign investors. Investments pouring into the country increase the demand for that currency. This increased demand causes that currency to strengthen against other currencies.

How do you measure the economic performance of a country? Three of the most important indicators of a country economic growth are: 1) Gross Domestic Product (GDP). 2) The unemployment rate and 3) The trade balance or the current surplus or deficit. Let’s discuss these three economic indicators.

GDP: GDP measures the total good and services that are produced in a particular country in a one year. Actually we will be usually talking about the GDP growth rate whether the economy is expanding or contracting. A healthy GDP growth rate figure usually adds a bullish sentiment to the currency of that country especially if it exceeds the market expectations. Always remember the markets react violently to surprises.

Unemployment Rate: The unemployment rate data reports the state of the labor market in the country. A low unemployment rate is considered to be a positive for the country’s economy and its currency. A low unemployment rate means almost all the consumers have jobs and they are willing to spend more. The more the consumer spends, the more the companies and businesses in the country sell. This generates more output and further expands the economy.

Trade Balance: This is another widely watched economic indicator in fundamental analysis. If a country exports more than it imports, the trade balance is in surplus. If the imports are more than the exports, the country will end up with a trade deficit. Trade deficits are not good and must be balanced by the capital account surplus otherwise a balance of payment problem will ensue.

For example, if US import more from Europe, USD will have to be sold in order to buy Euros to pay for those imports. This will result in the depreciation of USD relative to the Euro and other currencies. The opposite is true in case of a trade surplus. USD will strengthen relative to Euro.

Geopolitical risk is also very important. It refers to the risk of a country’s foreign or domestic policy affecting domestic social and political stability in another country or the region. Geopolitical risk can cause the currency of a country to move up or down relative to other currencies in short as well as long term.

How Interest Rates Affect Market Sentiment?

Develop your own forex trading system.You will be wondering what the factors that influence market sentiments are. Interest rates play a major role affecting the supply and demand of currencies in the global financial markets. Trends in interest rates are one of the most significant factors influencing market sentiment. Discover trend forex system.

Get good forex training.Every currency in the world has an interest rate attached to it and these interest rates are decided by the respective central banks. FED determines the interest rates in US. Bank of Japan determines the interest rates in Japan. Similarly the Reserve Bank of New Zealand determines the interest rates in New Zealand.

Now some currencies will have a higher interest rate. These currencies will attract the most attention from the savvy international investors who are always looking for a better interest rate yield on fixed income securities. This also depends on the economic and geopolitical risks of that country.

What causes fluctuations in the interest rates? In simple terms, inflation! The value of money decreases when there is an upward revision of prices of most goods and services in the country.

Central banks are responsible for ensuring the price stability in the domestic economies. Central banks control inflationary pressures by increasing the interest rates. Monetary policy is an important tool for the central banks.

Suppose the inflationary pressures are increasing in the US economy. FED would raise the Federal Fund Rate. Federal Fund Rate is the rate the banks charge each other for overnight loans. When overnight rates changes, retail banks will adjust their prime banking rates! This accordingly affects businesses and individuals in the economy.

A carry trade involves shorting of a low interest rate currency and going long on a higher interest rate currency in order to gain the difference between the two interest rates. This difference is known as the Interest Rate Differential. The most important way in which interest rates can affect the currencies is through the widespread practice of carry trade.

The trader is paid the interest rate on the currency on which he/she is long. He/she must pay the interest rate on the shorting currency. So you can see currencies with higher interest rates are highly sought after by investors looking for a higher return on their investments.

Investors tend to shift their assets to higher interest rate currency from lower interest rate currency. They have to buy that currency for that transfer of funds and assets. This increased demand for the currency pushes the currency price relative to other currencies. As a general rule, rising interest rates tend to strengthen a currency relative to other currencies.

In 2005, there was a lot of interest in Japanese investors to invest in New Zealand dominated assets as NZD was paying a higher interest rate as compared to the near zero interest rate being offered on JPY.

So in general rising interest rates should boost the market sentiment for that particular currency. The opposite is also true. Interest rates cut would result in bearish sentiments regarding the currency of that country.

Interest Rates & Forex Trading

Develop your own forex trading system.What are the factors that influence the market sentiment? Interest rates play a major role affecting the supply and demand of currencies. Trends in interest rates are one of the most significant factors influencing market sentiment.Discover trend forex system.

Get good forex training.Every currency in the world has an interest rate attached to it and these interest rates are decided by the respective central banks. FED determines the interest rates in US. Bank of Japan determines the interest rates in Japan. Similarly the Reserve Bank of New Zealand determines the interest rates in New Zealand.

Now some currencies will have a higher interest rate. These currencies will attract the most attention from the savvy international investors who are always looking for a better interest rate yield on fixed income securities. This also depends on the economic and geopolitical risks of that country.

The value of money decreases when there is an upward revision of prices of most goods and services in the country. You will ask what causes fluctuations in the interest rates. In simple terms, inflation!

Central banks are responsible for ensuring the price stability in the domestic economies. Central banks control inflationary pressures by increasing the interest rates. Monetary policy is an important tool for the central banks.

Suppose the inflationary pressures are increasing in the US economy. FED would raise the Federal Fund Rate. Federal Fund Rate is the rate the banks charge each other for overnight loans. When overnight rates changes, retail banks will adjust their prime banking rates! This accordingly affects businesses and individuals in the economy.

A carry trade involves shorting of a low interest rate currency and going long on a higher interest rate currency in order to gain the difference between the two interest rates. This difference is known as the Interest Rate Differential. The most important way in which interest rates can affect the currencies is through the widespread practice of carry trade.

So you can see currencies with higher interest rates are highly sought after by investors looking for a higher return on their investments. The carry trader is paid the interest rate on the currency on which he/she is long. He/she must pay the interest rate on the currency that has been shorted.

As a general rule, rising interest rates tend to strengthen a currency relative to other currencies as investors tend to shift their assets to higher interest rate currency. They have to buy that currency for that transfer of assets. This increased demand for the currency pushes the currency price relative to other currencies.

In 2005, there was a lot of interest in Japanese investors to invest in New Zealand dominated assets as NZD was paying a higher interest rate as compared to the near zero interest rate being offered on JPY.

So in general rising interest rates should boost the market sentiment for that particular currency. The opposite is also true and interest rates cut would result in bearish sentiments regarding the currency of that country.

Understanding Market Sentiment

Understand the forex market. Do you see the market as a big mechanical matrix which is devoid of emotions? How do you view the forex market is very important. Most traders have a love hate relationship with the market thinking that the market is either against them or for them.You can trade forex news.

The truth is that forex market is just the compressed display of emotions. At anyone time the market is emanating the emotions of currency speculators around the world. Develop your own forex trading system.

A market is like a big living organism. Think that this organism is made up of millions of cells. Each cell carries its own functions. It also interacts with other cells of the body keeping the living organism alive around the clock.

A forex market comprises millions of participants acting out their perceptions and emotions. Knowing what the market thinks and how it thinks is crucial to trading success.

Ultimately, you as the trader are dealing with other traders out there in the market whether they are big institutional players or an independent individual trader like you and me. You need to know what the other participants are thinking.

Market sentiment is the most important factor that drives the currency markets or that matter any financial market. What is the market sentiment? Market sentiment is simply what the majority of the market participants are perceived to be thinking or feeling about the market.

Traders tend to act based on what they feel and think of certain currencies regarding their strengths or weaknesses relative to other currencies. Market sentiment sums up to the overall dominating emotions of the market participants. It explains the current actions of the market as well as the future course of action.

One thing you should know is that market sentiment is not logical. It is primarily based on trader’s emotions. These emotions are one of the greatest factors in the determination of the currency exchange rate.

Market sentiment is like a fickle lover. It is capable of changing its mind based on new information that can upset the existing emotion. Market sentiment can be bearish, bullish or just plain confused.

If the majority of the market participants want to sell the currency, the market sentiment is deemed to be bearish. If the majority wants to buy that currency, the market sentiment is bullish. When most market participants are unsure of what to do at a particular moment, the sentiments end up being mixed up

If you can understand what the other traders are thinking and why the market is doing what it is doing, you will be in a better position to plan the entry and exit for your trade. Understanding the current market sentiment and exploiting it with an appropriate trading strategy can help maximize your trading profits. In Part II of this article we will discuss what factors influence the market sentiment.