Vital Economic Indicators that Influences Money Exchange Rates Fluctuations

Understanding how fundamental and technical indicators influence money exchange rates is essential for successful trading on the foreign currency exchange market.  

Miscellaneous factors drive the foreign currency exchange market, which is why every professional Forex trader should routinely follow and utilize different fundamental and technical indicators in his everyday job. Because the Forex market is characterized by high volatility, a novice trader could think that money exchange rates fluctuate randomly. As a matter of fact, most foreign currency exchange moves are based on real-life events and are reflected in economic and financial indicators that reflect the state of economy and markets.  

Most important fundamental indicators influencing the money exchange rates include GDP growth, inflation, unemployment, balance of payments, public debt, and to some extent, foreign exchange reserves. The other indicators are called technical indicators, which reflect the market position of a currency rather than economic data behind the value of a particular currency. You should also add to this list the psychological factors that drive the overall market sentiment, although they relate to the economic indicators in a very complicated manner.  

You should learn to read simple signals related to economic indicators. For example, when the inflation numbers go up and the pace of GDP growth slows down, it is a clear signal that the money exchange rates of the nation's currency against other world currencies will start to depreciate, or the currency will begin to lose value. If imports significantly exceed exports, it is also very likely that depreciation will occur, unless the imbalance is funded by a growing foreign debt, a policy that the United States is practicing for decades.  

However, these are only informative signals and a good Forex trader will utilize other analytical tools before deciding in what direction the currency rates will head in the foreseeable future. Technical indicators like Relative currency strength and Absolute currency strength are commonly used to determine future fluctuations of the money exchange rates although they can be read either way sometimes. Nevertheless, they provide a good base for a trader to assess whether a currency market is overbought or oversold. These two indicators do not reflect the “real” value of a currency, but its market gains and loses are based on closing prices during a specified period, usually more than three months.  

Reading an isolated economic or technical indicator could be a tricky undertaking if you do not take into account a larger basket of indicators. Some indicators could signal entry in the market, while a thorough analysis of additional indicators can prove it a false signal. Never take important decision on the base of a sole indicator due to the great complexity of factors determining the fluctuations of the money exchange rates. Moreover, additional indicators like the level of foreign exchange reserves of a country could change the picture. A country like China possesses a huge foreign exchange reserve that is why it is hard to play against the China's Central Bank if the governors decide to support the Yuan while you are trying to gain profit from the depreciating money exchange rates of the China's national currency. Finally, there are psychological factors that can be crucial for future market moves, and sometimes, the market direction is determined even by rumors heard on the street.

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About the author

Ridgewell Hawkes writes articles relating to the financial services. If you need to make a large or regular overseas payment consider the help of a currency transfer specialist.

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