Jayden 1. Political factors affecting short-term volatility in the forex trading market
As the currency is a representative of a country’s creditworthiness, so compared with the stock and bond markets, the forex trading market is more influenced by national and international political factors.
When a major international or domestic political event occurs, the forex trading market will rise and fall more than the changes in the stock and bond markets.
The main reason is that forex trading as an international flow of assets, in the turbulent political pattern of the risk will be larger than other assets; and the forex trading market flow speed, and further make the forex trading market in the political situation when the turbulence more violent volatility.
According to the historical data of the forex trading market, the main political risks in the forex trading market are political instability causing economic policy changes, nationalisation measures, etc. In terms of specific forms, there are general elections, wars, coups, border conflicts, terrorist events, etc.
From the perspective of capital security, as the United States is the world’s largest military power today, its economy also remains ahead.
So, generally after political unrest outside the Americas, the dollar acts as a “safe haven” and will immediately go strengthen. Political events are often sudden and unexpected in the forex trading market, which makes the spot price of the forex trading market fluctuate unusually sharply, and its volatility greatly exceeds the long-term volatility of the exchange rate.
2. Economic factors affecting short-term volatility in the forex trading market
Forex trading not only needs the backing of national power, but also cannot be backed by the economic strength of the country.
Among the economic news that affects the volatility of the forex trading market, the economic statistics published by the US government on a monthly or quarterly, basis on the US economy play the biggest role, mainly because the US dollar is the most important currency trading in the forex trading market.
The content of economic statistics, in order of their role, can be divided into changes in interest rates, the growth or decline in employment, gross national product, industrial production, foreign trade, inflation and so on. This alignment is not absolute.
Below we briefly describe some very important economic factors and data.
(1) Interest rate policy.
Historical statistics show that, of the various economic data, the adjustment of interest rates and the monetary policy movements of governments in each country have always been of the highest importance in terms of their impact on exchange rate movements.
The interrelationship between forex trading rates and interest rates is not described in detail here, but it is important to emphasize here that sometimes a country’s currency exchange rate can fluctuate significantly as long as the market has such expectations, even though the government has not given any indication of a change in monetary policy.
For example, in the second half of 1992, Germany pursued an anti-inflationary and tight monetary policy, the German Central Bank repeatedly stated that it would adhere to this policy, but rumours and speculation were often circulated in the forex trading markets that Germany was going to cut interest rates, on the grounds that German interest rates had been raised to the top.
Although Germany did not have any movement to cut interest rates, after the UK, France, Denmark, Sweden, etc. cut interest rates one after another, the forex trading market stubbornly believe that Germany will cut interest rates, even if not in the end of the year, but also will be announced at the beginning of the second year. This caused the exchange rate of the Mark to fall against the US Dollar at a time when the interest rate differential between the US and Germany remained wide.
(2) Non-farm payroll data.
The Keynesian idea of promoting employment has had a profound impact on modern national economic management. The US figures on the increase or decrease in non-agricultural employment and the unemployment rate are important data that have influenced short-term fluctuations in the forex trading market in recent years.
This set of data is released by the U.S. Department of Labor on the first Friday of each month. In this view of the forex trading market, it is the macroeconomic “barometer” of the United States, and the figures themselves are indicative of the economic outlook for the United States.
As such, the dollar sell-off comes to a screeching halt a day or two before the figures are released, whenever there is any whisper in the market that the figures might be good.
(3) Other important economic data.
A number of other US economic statistics also have an impact on the forex trading market. These include industrial production, personal income, gross national product, starts, inventory rates, the leading index of the US economic composite, new housing starts, auto sales numbers, etc., but they have a smaller impact on the forex trading market compared to the non-agricultural employment numbers.
These economic indicators have a unique pattern of impact on the forex trading market. Generally, when the dollar presents an upward “bull” trend, any of the indicators in the announcement as long as slightly better will be used as a reason to buy the dollar in the forex trading market, so that the dollar further upward, and the indicators are negative, the forex trading market sometimes ignore to its data.
Likewise, when the dollar is in a downward “bear” trend, any published economic indicators that are negative, will be used as a reason to further sell the dollar in the forex trading market.
Nikki, Germany and other monthly wholesale prices, retail price index changes on the forex trading market also have an impact, but the size of the impact depends on the specific conditions. Generally, when the market for a country’s central bank exists to cut or raise interest rates in anticipation, its monthly price index published on the forex trading market sensitivity is very strong.
(4) Other economic factors.
Economic data is not the only economic factor that affects the forex trading market. In addition to economic statistics, other reports of economic activity can have a significant impact on the forex trading market.
Changes in forex prices are largely a reflection of the expectations of those traders in the forex market.
In other words, if one expects a certain long-term equilibrium price for forex trading, then the fluctuations in the spot price will move in the direction of this price. This expectation is something subjective, and it is necessarily influenced by the objective economic environment.
Thus, a speech by an official of the monetary authority of the country concerned, an influential article in the Wall Street Journal on the forex trading market, a research report by a research institute or a major corporation on the movement of forex trading, etc.
In the absence of data on the distribution of economic activity for several days in a row, may cause sharp fluctuations in the forex trading market on a given day.
This phenomenon seems difficult to understand for those who are outside the forex trading market. Why would a speech by an official cause the dollar to plunge or jump 200-300 points?
This phenomenon is not difficult to explain it takes into account the subjective expectations of people. An important article on forex trading in an official’s speech merely provides some kind of signal that acts as a catalyst for people’s reasonable expectations, which eventually leads to volatility in the forex trading market.
The magnitude of the volatility is determined by the size of the catalyst role of these signals in reasonable expectations. But it is not that simple. If the market does not see it as a signal, the forex trading market will turn neglect such statements.
