Monday January 7, 2019 - 14:15:31 GMT
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Politics, Inflation and Speculation: How to Choose Which Currencies to Trade
Forex trading has long been seen as a smart, exciting way of investing. Yet, newcomers may wonder what factors to consider to get started. How exactly do you decide which currency is most likely to rise or fall against another?
While this is an incredibly complex and difficult subject to master, there are some important issues to bear in mind that show which currency pair could be the most profitable for you. The following are a few of the issues that will help you to make a good decision.
Look for Big Political Changes
When a country goes through a period of political uncertainty it often causes their currency to drop in value. For example, foreign investors may look elsewhere, and tourism revenue may also drop if the country is in political turmoil.
This is something that we can clearly see throughout the process of Brexit. As the UK prepares to leave the EU, each new Brexit announcement or key milestone sees the markets react, which has resulted in big swings for the British Pound.
Of course, the crucial point now is how the Pound will be valued after Brexit is completed. There is widely differing opinion on what will happen, meaning that there is a chance for big profits if you get it right.
Inflation and Interest Rates
Another matter that needs to be considered is that of inflation and interest rates. These two issues are closely linked to the value of a nation’s currency. In basic terms, a low inflation rate helps to keep the value of the currency high. An extreme example comes from Venezuela, where an annual inflation rate of some 83,000% has led to the Bolivar being heavily devalued.
In the same way, interest rate rises tend to help the national currency to increase in value. While this isn’t a straight-forward matter, the general rule is that increasing interest rates attract a greater level of foreign investment and improve the demand for the local currency.
What does the future hold for the UK in this respect? Well, upon leaving the Monetary Policy Committee, Ian McCafferty said that interest rates could remain significantly lower than 5% for at least a couple of decades from now.
Speculation and Confidence
Among the other important factors are speculation in the market and confidence among traders. These issues are often more fluid and harder to spot in time than the previous points that we have looked at here. You may have to follow markets such as the FTSE 100 to get a clearer idea of what the future holds.
However, it is also clear that the speculation and confidence can arise from the other points. If the political scene is in turmoil or inflation is out of control, then this is likely to cause confidence in the currency to fall. This, in turn, could lead to trader speculation that pushes it down further.
Forex trading isn’t a science. If it was, then no one who was well-prepared would ever lose any money on it. Yet, by understanding the key issues, it should be possible for you to make informed decisions that reflect what is going on in the markets.
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