The foreign exchange market is comprised of currencies from nations all over the world. Given the unique and complex nature of each and every economy around the globe, it is an impossible task to identify all the factors that drive currency prices. However, the factors that are listed below will give you a good starting point for gaining an understanding of the type of factors many would consider the primary drivers.

Economic Releases

First, an over simplified concept that is important to understand is that capital flows into economies that are considered safe, stable and growing. Economic releases can be thought of as real-time reports that give investors a glimpse into the underlying performance of the nation’s economy. These reports are usually published periodically by governmental agencies or private organizations. Although there are numerous policies and factors that can affect a country's performance, the factors that are directly measurable are included in economic reports. (For a comprehensive overview of economic indicators, check out our Economic Indicators Tutorial.)

Having a strong understanding of economic events allows investors to compare one country’s performance against others around the globe. Before we jump into some examples of specific releases, it is important to know that there are many economic calendars made freely available online to track the release of economic announcements. Many even highlight announcements based on their likelihood that they will impact the exchange rate. Here are some of the most common economic releases that investors pay attention to:

Gross Domestic Product (GDP)

GDP is a report that outlines the monetary value of all the finished goods and services produced within a country during a specific time period. GDP is one of the most watched metrics in forex trading because it is a clear indicator as to whether an economy is growing or shrinking and how much it is changing relative to the opinion of analysts.

Non-farm payrolls

Non-farm payroll figures refer to any job in the economy with the exception of farm work and other situations such as those employed within the military and intelligence agencies. This release holds such influence because it provides a gauge for investors in determine whether corporations are hiring. When reports suggest that non-farm payrolls are improving and strong, it can be interpreted to mean that the companies are growing and that newly-hired employees have money to spend, which will in turn fuel broad economic growth. Growing workforces and a strong economy will often lead to a strengthening currency. (For more, see: Trading The Non-Farm Payroll Report)

Retail Sales

The retail sales is a very closely watched report that measures the total receipts, or dollar value, of all merchandise sold in retail stores in a given country. The report estimates the total merchandise sold by taking sample data from retailers across the country. Because consumers represent more than two-thirds of the economy, this report is very useful to traders to gauge the direction of the economy. Also, because the report's data is based on the previous month sales, it is a timely indicator, unlike the GDP report which is a lagging indicator. The content in the retail sales report can cause above normal volatility in the market, and information in the report can also be used to gauge inflationary pressures that affect Fed rates. (Refer to our Inflation Tutorial for a primer on inflation.)

Industrial Production

The industrial production report, released monthly by the Federal Reserve, reports on the changes in the production of factories, mines and utilities in the U.S. One of the closely watched measures included in this report is the capacity utilization ratio which estimates the level of production activity in the economy. It is preferable for a country to see increasing values of production and capacity utilization at high levels. Typically, capacity utilization in the range of 82-85% is considered "tight" and can increase the likelihood of price increases or supply shortages in the near term. Levels below 80% are usually interpreted as showing "slack" in the economy which might increase the likelihood of a recession. (Be sure to also check out our Federal Reserve Tutorial so you understand the role of one of the most important players in forex markets.)

Purchasing Managers’ Index (PMI)

The Purchasing Managers’ Index (PMI) is derived from reports from purchasing executives from a variety of corporations across the manufacturing sector. The PMI figure is calculated based on five major indicators: new orders, inventory levels, production, supplier deliveries and employment. The primary purpose of this indicator is provide investors with a snapshot of the state of the manufacturing sector and whether it is expanding or contracting. For more, see: Economic Indicators: Purchasing Managers Index (PMI)

Other common economic releases include

-Consumer Price Index (CPI)
-Retail sales
-Durable Goods
-Unemployment

These economic releases are not the only factors to watch. There are also several meetings around these events that provide quotes and commentary, which can affect markets just as much as any report. These meetings are often called to discuss interest rates, inflation and other issues that affect currency valuations. Even changes in wording when addressing certain issues such as comments from the Chair of the Federal Reserve on interest rates, for example can cause market volatility.

Capital Markets

The stock market is often regarded as the barometer to a country’s economic performance. Strong stock markets are often indicators of strong and growing economies, which in turns leads to increased foreign investment and demand on the currency. The performance of major global financial markets is a key indicator used by forex traders. (For more, see: Economic Factors That Affect The Forex Market)

International Trade - Balance of Trade

The interconnectedness of the global economy means that the status of international trade is a key indicator of an economy’s competitive advantage. The balance of trade, or the difference between a country’s imports and its exports, is a common metric used in conjunction with other data points by forex traders for determining a country’s economic health. In general, investors get concerned when a country’s imports are larger than exports, known as a trade deficit, over a prolonged period of time. Persistent trade deficits are closely watched because they can put a nation at risk or future currency devaluation. At this stage, the important thing to understand is that data points about the Balance of Trade and/or the state of international trade in general are commonly used in conjunction with other economic data to determine a nation’s economic health.

Differences in Interest Rates

Varying interest rates among lenders in different nations is one of the primary drivers of currency prices. This concept is discussed in more detail later on, but at this point, it is good to understand that generally speaking, foreign capital tends to flock toward higher interest rates, which in turn causes exchange rates to rise. (For more, see: Why Interest Rates Matter For Forex Traders)

Politics

Forex traders try to stay as informed of polictical news and events as possible. Factors such as newly-elected leaders, changes in fiscal or monetary policy decisions, and overall openness to trade and commerce impact the performance of a nation’s economy and therefore its currency. One example that is worth noting is Brexit, which was the vote for a planned withdrawal of the United Kingdom from the European Union, which sent the British Pound (GBP) to a multi-decade low due to the uncertainty surrounding the UK’s economic prospects. While this is a drastic example of the impact of politics can have on currencies. Sometimes even comments from nation’s leaders or hints of an upcoming market can trigger large price swings. (For more, see: How Global Events Affect The Forex Market)

Technical Analysis

Given the scale of the forex market, it is quite common for investors to use charts and the various tools of technical analysis as the basis of making buy and sell decisions. More specifically, given the liquidity of the market and broad number of fundamental factors that influence prices, it is warranted to assume that all salient data is already priced in to exchange rates. We’ll take a closer look at some specific chart patterns and indicators later on, but at this point it is important to understand that since so many rely on the charts that common signals can be enough to trigger moves in an underlying currency. (For more on this topic, see: Technical Analysis Works In Forex Markets)

Understanding the factors that move currencies is an important first step to becoming a successful forex trader. Simply following global news and events, reading analyst reports, examining reliable commentary and analyzing chart patterns can help forex fundamental analysts gain a better understanding of long-term market trends and allow short-term traders to profit from extraordinary happenings. If you choose to follow a fundamental strategy, be sure to keep a calendar that highlights important dates so you know when these reports are released. Your broker may also provide real-time access to such information.

Now that you've gotten your feet wet, let's dig in a little deeper into the basics of forex.

Currencies

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