NoaFX Tutorial

1.5 Market sentiments that traders react to

As we have understood from our earlier topic that supply and demand are the two factors or forces that affect the forex market. One key to understanding movements in the forex market is to understand what are the actual forces that affect the levels of supply and demand. Let us therefore understand the different factors that continually affect these two omnipresent forces.

Supply and Demand are purely driven by the perception of the market. When the market perceives the current value of a currency is of better value than what it was before, they will be more willing to acquire the currency. Likewise, when the market perceives that the current currency (asset) is worth less than what it was when they had since purchased it or was before, they might be less than willing to acquire it, or even hold on to their assets if they had already bought it.

There are countless different factors that may indirectly affect the "perception" or judgmental abilities of the market. However, on a direct front, various forces like the business environment, stock market, political factors, and economic data are determinants to the behavior of supply and demand.

The different environments in which a business would function are collectively defined as its business environment. These environments are the social, technological, economic and political environments. The business environment would greatly affect different aspects of business. These would include organizational decisions, business strategies, different processes, and economic/business performance.

Positive indications would increase the supply and demand for a specific country's currency. Government policies affect currency movements. There are countries where trade can be fairly regulated by government agencies. Competitive advantages also affect currency demand and relative investments in a given currency. Market size is also a defining factor. The more enterprises that invest in a certain country or territory the demand for such currency also increases.

The stock market is definitely related to certain degree by the business environment. A stock market is quite simply an exchange where stocks of multiple different entities are being traded. Company stocks are capital that is raised by a corporation by its distribution of a number of portions in the company's capital. Owners of the said stocks receive dividends or profits to the portion of the value of the company. Movements in the stock market are correlated to the currency rates. Major stock indices provide a good daily glimpse at the changing moods of the business environment and in turn affect a currency's supply and demand.

Exchange rates and currency supply and demand are heavily influenced by the different political factors. New governments who are sworn-in cause anticipation when replacing overthrown powers and cause political instability which affect investment considerations. Substantial rises or drops in investments in certain countries become beacons to the exchange rates and also in the forex market.

Different events or political conditions in different governments affect the rise and drop in investor confidence which affects investments and of course, overall currency flows.

The other most important and commonly used indicator is Economic data. Different economic data not only reflects the condition of a country's economy, but it also affects the supply and demand in the currency exchange market. When a key financial or economic statement is due from one of the major players in the global economy; you can anticipate an effect on the currency exchange markets. These financial statements include reports of the nation's GDP or Gross Domestic Product, inflation, unemployment levels, trade deficits etc.

A lot of these information are given out on a regular basis at prearranged dates, and you will see significant volatility in the foreign exchange markets at the point of data release. Labor reports such as payrolls, employment/unemployment rates and hourly earnings show productivity in the labor sector. Other items in economic data like Gross Domestic Product (GDP), Producer Price Indices (PPI), International Trade, Consumer Confidence, Productivity, and Consumer Price Indices also affect a country's currency exchange rates and supply and demand.

Confidence is what drives perception about a certain currency and it is this perception that creates supply and demand which will cause exchange rates to fluctuate.


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