What Moves the Markets?

As traders, we seek opportunities in markets that move—but what actually drives these movements? Why do currency pairs like GBP/USD fluctuate? What drives the price of commodities like gold or oil? Understanding the forces behind market fluctuations is essential for anyone looking to trade successfully. In this guide, we’ll explore the key factors influencing currency markets, commodities, and broader financial markets.

Who Trades in the Currency Markets?

You don’t need to know every participant in the market to trade successfully, but having a basic understanding of who is buying and selling can be useful. Here are some of the key players in the currency markets:

• Global corporations → Large multinational companies, such as Ford Motor Company, conduct business across various countries. When they receive payments in different currencies, they need to exchange them into their home currency, affecting supply and demand in the forex market.

• Hedge funds → These investment funds often speculate on currency price movements to generate profits, contributing to market volatility.

• Central banks → National banks such as the Bank of England or the Federal Reserve influence currency markets by adjusting interest rates and sometimes directly intervening to support or weaken their own currency.
  
  

All these participants contribute to the liquidity and movement of the forex market, each with different objectives—some aiming to hedge risks, others to speculate on price changes.

The Fundamentals of Currency Pricing

Currencies are traded in pairs, such as GBP/USD, meaning the value of one is always measured against another. But what determines the price of a currency pair?

The answer is simple: supply and demand.

When there is more demand for a currency, its value rises. When there is less demand, it falls. However, multiple factors influence this balance, including economic data, interest rates, and geopolitical events.

Understanding the Carry Trade

One of the most significant concepts in currency trading is the Carry Trade. This strategy takes advantage of differences in interest rates between countries.

Every country sets its own interest rates, meaning borrowing and saving conditions vary. Some countries have low interest rates, making it cheap to borrow money, while others offer high interest rates, making it attractive to deposit funds.

For example, back in the early 2000s, traders could borrow money in Japan at an interest rate close to 0.5% per year, convert the funds to New Zealand Dollars, and deposit them in a New Zealand bank offering 8% interest per year. This created a potential profit of 7.5% per year—a great return for what seemed like minimal effort.

However, carry trades are not risk-free. If interest rates change or the exchange rate moves unfavourably, profits can quickly turn into losses. Markets are constantly shifting, and traders must monitor conditions carefully.

Key Market Movers in Forex Trading

Central banks play a critical role in influencing currency markets. If a currency becomes too strong, it can hurt a country’s exports, making goods and services more expensive for foreign buyers. Conversely, a weak currency can boost exports but may lead to inflation.

Forex traders pay close attention to central bank policies and statements, as they can significantly impact exchange rates. Some of the most influential factors include:

• Interest rate decisions → Central banks adjust interest rates to control inflation and economic growth. Higher interest rates often attract foreign investment, strengthening a currency.
• Economic data releases → Reports on employment, inflation, GDP growth, and consumer confidence provide insights into a country’s economic health, influencing trader sentiment.
• Geopolitical events → Political instability, trade wars, and global conflicts can lead to sudden currency fluctuations.
  
  
  

What Drives Short-Term Market Movements?

Intra-day price movements in the forex market are influenced by various participants, including:

• Commercial firms → Large companies making international transactions.
• Day traders and trend traders → Speculators seeking short-term profits.
• Hedge funds → Institutions placing large bets on currency trends.
• Pension funds → Investors managing long-term financial assets.
  
  
  

Final Thoughts

Market movements are driven by a combination of fundamental factors (such as interest rates and economic data) and market sentiment (such as expectations of future events). Forex traders closely monitor central bank announcements and global news to anticipate price changes and capitalise on opportunities.

For traders looking to stay ahead, use tools like TraderGuide’s economic and trading calendar in the top menu to keep track of important events and data releases. Stay informed and trade with confidence.