What Moves Forex Markets? News, Supply and Demand Explained


In this latest video we’re going to take
a look in a bit more depth about what actually moves the foreign exchange
market. So we’re gonna look at what government announcements and news you
need to keep an eye on when trading forex. Hello, I’m David Jones from capital.com and this is the latest part of our “How to Trade Forex” course. We’re now
going to start digging into things in a bit more detail. Next time around we’re
gonna start on trading strategies, so make sure you’re subscribed to never
miss out on that new content but first of all, let’s just spend a bit of
time looking at what major announcements and what sort of news can really move
foreign exchange markets during a typical trading month. Potentially
there are lots of different announcements that can have an impact on
the market but month in and out I think there are some real key ones to keep an
eye on. So without further ado let’s get into that. Let’s take a look at what
actually moves currency pairs around and as traders what we need to be watching
during the week, the key announcements that we need to keep an eye on. Let’s
start off with a high level view of what to watch when it comes to foreign
exchange. First of all government announcements. So for example monthly
unemployment numbers can give us an idea as to how healthy or not an economy is. These tend to be closely watched. Also announcements from central bank’s
whether it’s the Bank of England, the US Federal Reserve, the European Central
Bank, the Bank of Japan on interest rates and how they see the economy. These can
also play a major part in short and medium term volatility for foreign
exchange markets. Then of course there’s wider news in recent years. We’ve had
Brexit. We’ve got concerns about trade wars between the USA and China for
example. So these larger economic factors will also impact various
currency exchange rates. And finally there’s market sentiment. We’ll look at a
couple of examples when we come to the end of this. But, I mean, just the overall momentum in a market, you know, can
increase the volatility and have markets overshooting in both directions. So we’ll
take a look at that. Let’s deal with government announcements. So these are
released on a regular schedule throughout the month, so every month we
have for example, unemployment data inflation data, this sort of thing. And
these are really the two I think to watch + GDP. So GDP is gross domestic
product. Is the economy growing, is the economy shrinking, is there a risk of
recession. So for example if we saw, let’s say, the eurozone, some of the major
economies there slip into recession, that could well influence how the central
bank reacts. Which has an impact on the currency. So all these things are tied in
together. But these are some of the main ones to watch. Then we have central bank
announcements, interest rate decisions. We have been in for many years a low
interest rate environment, although rates have been creeping up over the past year,
18 months or so. Particularly when it comes to the U.S. But typically there will
be one announcement a month from a country’s central bank. So even if they
don’t change the interest rate, they will often provide commentary around how they
see the economy for their particular area evolving and these sort of
statements again can inject volatility into the various foreign exchange
markets. So even if there’s no change expected, it’s still a big announcement
to watch. In the U.S. it’s the Federal Reserve, for the eurozone it’s the
European Central Bank, for the UK it’s the Bank of England and in Japan it’s the
Bank of Japan. So when this announcement is due to be made, there’s normally an
expectation about what’s going to happen. So it tends not to be a surprise, the
actual announcement but also they will offer and give guidance and maybe hints
as to how they see rates moving in the future. So more often than not it’s their
look or word that’s the important part of the
announcement, rather than the decision itself. Let’s move on to wider news. This really can be anything that we think could potentially affect a
country’s economy and that will have a knock-on effect for its currency. If an economy is shrinking, then usually the currency will be falling as well and
vice versa. In times when things are going well, the performance of the
currency is often seen as a vote of confidence in the economy. So what sort
of things do we need to keep an eye on? Well trade rules for example, that’s something
that has definitely increased in importance in recent months. So the
threat of.. for example the U.S. imposing tariffs on China’s export to America or
the export of European cars to the U.S. So the trade wars here can really have
an impact. Brexit of course has been a big factor for both the pound and the
euro for the past two and a half years now, so it’s the the actions of
politicians that can really have an impact on the currency marke(if they think that’s
going to affect the country’s economy). Political instability if we saw, you know,
a lack of confidence in a current government in one area of the world. That
can cause a loss of confidence in that country’s currency. Something maybe less
tangible is market sentiment and I think maybe the best way of illustrating this
is to go through some examples because trends can take on a whole life of their
own. Often if a market starts moving really strongly in one direction it
fuels more people to take positions in the same direction and so it carries on.
On the downside, selling sparks off more selling. If we see a currency, maybe
really starting to crash because that country’s economy is in a mess,
then as there’s more and more selling it can fuel more aggressive selling, pushing
that currency ever lower. Let’s look at a couple of examples. First of all the UK
Brexit decision in 2016. So on the day of the vote the expectation was that the
UK would vote to stay in the European Union. Pound U.S. dollar (GBPUSD) briefly touched
1.50 on the night of the vote, as the polls closed. But as the evening went on
and into the early hours of the morning. It suddenly looked as if the UK could
actually vote to leave the EU and see what happened next? So there’s the move – you can see a massive turnaround in sentiment, the
pound really collapsed overnight and there was an element of of panic in the
market and that brought out more sellers. So we saw over the course of little more
than 24 hours a 1800 point turnaround in the fortunes of the pound against the US
dollar. So trying to go against that sentiment.. there was just so much
pressure on the back of the vote to leave that it did really fuel more
selling and we saw the market pretty much collapse over a couple of days. Of
course markets can get carried away to the upside as well. A great example of
this is the cryptocurrency bubble in 2017. Let’s take a look. It was probably the
late summer of 2017 when things really started to move. We’re looking
here at a chart of Bitcoin. It was trading around about 2,800. Let’s just
jump forward a month. So a month later the price had increased from 2,800 to
about 4,800. So there was ,this is the thing, when the frenzy was maybe really
starting to take hold amongst the wider public and more and
more people moved in to buying Bitcoin because they thought the price would
just carry on moving higher. Let’s jump forwards again. So by mid November 2017
the price of Bitcoin had touched $10,000 so people who’d bought were sitting on
open profits, there was lots of press saying about how high Bitcoin could go.
It was gonna change the world and there really was a frenzy building. Let’s jump forward again. By mid-december the price almost doubled again, so we almost
touched 20,000 by mid-december. And here, this is really
market sentiment running away. And the buying and pushing the price higher,
just fueling more buying and bringing in more buyers. And this shows you just how
important market sentiment is. And to bring ourselves up to date, I think we
all know what happened next. 20,000 or just below 20,000 ended up being the all-time high. And since then the price has sold
off and at the time of recording was trading just below 4,000. So
we’ve seen market sentiment in both directions here. The fear of missing out
driving the price up and the fear of the price crashing, just bringing out more
sellers. It’s an extreme example but it does show how important sentiment is. And
just one more recent example – the Turkish lira crisis in 2018. So there are real
concerns about the Turkish economy and we saw what was effectively a run on the
lira in August 2018. So this is U.S. dollar Turkish lira (USDTRY). When the market
chart is going up, that’s U.S. dollar strength. You can see it came into July
trading around about 4.45, so one US dollar was worth four and a half
Turkish liras. But then fear really gripped this market
and we saw sellers of Turkish lira and of course buyers of U.S. dollar. So the
price went from 4.6 to briefly as high above 7.2 in
mid-august. Since then the price has calmed down but you can see just how
sentiment can really grip a market and how fundamentals and normal news flow
can be disregarded, as that sentiment takes hold.So you can see that
potentially there’s a whole load of announcements that can move the currency
markets but the big ones month in and out – interest rates announcements from
central banks, the U.S. non-farm payrolls (that’s the U.S. unemployment numbers).
It’s a major announcement, usually on the first Friday of the month but sometimes
gets pushed back to the second Friday. And then inflation announcements, because
that does have an impact potentially on what central banks are
gonna do when it comes to interest rates. So it’s easy to track all this, as we saw
in the economic calendar on our website and you’ll see how the markets reacted. But I’d say those are the ones you need to be aware of, plus of course the
broader backdrop, as we’ve seen in the last couple of years. Brexit discussions, Brexit negotiations and the lack of progress has had a real
impact on the likes of the pound and the euro. Next time around, as I said we’re
going to start looking at trading strategies, we’re going to start
exploring the world of technical analysis and charting. But we’ll start
wrapping up this latest lesson. Of course don’t forget we also do analysis on
various markets throughout the week. Whether it’s the euro, gold, oil, stock
market indices, crypto currencies, that sort of thing. We do live broadcasts
direct from our YouTube channel, just staying on top of what’s happening with
markets. To find out more about the company go to the website capital.com. You can open up a demo account and try out some of the techniques that I talked
about here. And of course when you’re ready to start trading it’s easy to fund
it and start trading with real money. And to never miss out on our content just
make sure you’re subscribed by clicking the subscribe button down there and the
alarm bell notification means you get a push message every time we upload new
content. But for this latest part of our course on how to trade forex, we’ll wrap
things up there. So from me David Jones and capital.com – good luck with your
trading!

2 thoughts on “What Moves Forex Markets? News, Supply and Demand Explained”

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