Last update 2020.08.07
Lots of factors affect forex market trading prices, but if we must begin somewhere, it certainly is in the economic tripod, of monetary policy, interest rates, and inflation.
Inflation is indicative of how much our money can buy (i.e. purchasing power) and how fast this capability is lost over time. A decrease in inflation is considered deflation. Countries like Venezuela and Syria continue to face huge yearly inflation rates.
It means their currency can’t hold its value as it continually faces devaluation in front of strong currencies like US dollars or assets like gold.
Cycles of the economy
A growing economy creates an inflationary process by design, so small increases in the inflation rates are natural in any country. As the cost of goods increases, wages must increase as well, along with increases in business productivity, followed by consumer spending.
This economic cycle is important because if consumers stop spending there is the risk of growth slowing down while the price of goods could continue higher. Therefore, inflation and the economy both directly affect the value of currency, and forex market prices.
Negative inflation (deflation), and taxes also represent an important measure of the state of the economy, because when they decrease it means economic activity is weak and production factors are slowing. The unemployment rate is also closely monitored to measure the state of the economy.
The second very important part of this tripod is interest rates. The cost of capital can be measured in the interest rate charged by lenders, including how much a government or business can pay to borrow money or stimulate an influx of capital.
One specific interest rate is unlikely to control inflation in the real economy forever, so most of the central economic authorities try to manage their economic policies through periodic changes to the interest rates. These rates directly affect government bonds such as US Treasuries.
In an open market economy, there is transparent communication from officials every time governments raise or lower their interest rates.
More solid economies have lower interest rates and longer periods to pay, but less developed economies, such as certain emerging markets, have to offer higher rates to attract the same (or even less) amount of capital. There is usually a higher level of risk associated with high-paying interest rates, when it comes to debt instruments such as bonds.
Finally, our tripod is complete after we look how monetary policy, together with inflation, and interest rates, affect currency exchange rates.
Monetary policy includes not just the policy towards interest rates, but also whether there will be stimulus packages put together, such as quantitative easing programs aimed to boost economy growth.
In addition, central banks may suddenly intervene in forex markets to help strengthen or devalue their currencies, which can have an immediate or sustained impact on forex prices.
Such stimulus packages always come as a real cost to consumers, whether it be in increased prices or future tax increases.
At the end of the day, the monetary policy affects the value of the host country’s currency, which affects its value relative to other forex pairs.
The US dollar (USD) is widely considered a strong reference relative to other currencies, along with the euro (EUR), and the Great British pound (GBP).
More recently we have experienced the exchange rates of non-regulated currencies, known as cryptocurrencies, including bitcoin, and ethereum, among other digital assets.
These new alternative assets have garnered interest for some of their inflation-resistant properties, with limited supply, yet their prices have been compared to speculative commodities, because of very high volatility and therefore risk.
In summary money is what makes our daily life easier, but at the end, it is just another product with special characteristics.
Therefore, traders can trade, accumulate, borrow and so on, and if they use their money wisely, and realize the effects of compound growth. If we are interested in some other factors that can influence forex, we can look upon a group of real economic indicators, like production, employment and Gross Domestic Product (GDP).
These indicators represent how strong the economy is and its capability to generate value and wealth. In the international scale, as each country competes, forex creates a world market for currencies.
Within the monetary economy, we have factors such as speculation, international trade relations and government debts, as relevant aspects to be aware while trading forex.
These points have strong relations with expectations and informational flow, such as daily financial news and announcements. It is possible to feel its impacts very quickly and deeply, especially in our current society, with so many channels of communication.
The mood of the market can easily turn with a tweet of an important president or a leakage of information into the media.
It is very important to know that high risk and high return investments are a complex multifactorial business.
Human cognitive capacity is limited to deal with this complexity; therefore, technology came to help and to improve our capability to act correctly.
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Highly qualified professionals with extensive experience in economics, financial markets and engineering produce this content.
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Each AI forex signal alert consists of the following five data points:
- Symbol (forex pair)
- Direction (long or short)
- Position size (number of units or lots)
- Take profit (price level to exit with maximum gain)
- Stop loss (price level to exit with maximum loss)
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- Set an amount and a position size on your Wiseinvest dashboard.
- Copy the signals that we will send to you via email and paste you’re your Brokerage account.
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- None can control the three macroeconomic prices simultaneously (inflation rate, monetary policy and interest tax rates).
- Poor economic activity has a bad influence over financial markets and currency rates for a given economy.
- Analyzing the forex is a multifactorial problem, made easier with the use of AI forex system, to help achieve better results.
There is no Artificial Intelligence smart enough to predict what governments are going to do next, but we can help warn you sooner!
Disclaimer: Forex and Contracts for Difference (CFDs) are complex instruments and come with a high risk of losing money due to leverage. Forex trading is not suitable for everyone. You should consider whether you understand how forex and CFDs work and whether you can afford to take the high risk of losing your money.
The forex brokerages displayed shall disclaim the overall performance of traders in their platforms. Oanda warns that 76.8% of retail forex traders lose money trading CFDs. XTB warns that 80% of retail forex traders lose money trading CFDs. The forex broker Fxcm warns that 69.66% of retail forex traders lose money trading CFDs.
The performances aforementioned are not related to Wiseinvest AI forex trading and AI forex signals system. You can check the performance of our AI forex system on our dashboard.