The Forex Tree Dude's Blog

Market Psychology, Macroeconomics and Forex Exchange Rates

                                                     There are many factors that influence Forex exchange rates, from macroeconomic data to trading volumes and market psychology. Many people, though, are surprised to learn that market psychology often plays a bigger role in price movement than any other factor.

Macroeconomic Data Moves Forex Exchange Rates

The Forex market exhibits the highest degree of fluctuation in reaction to economic data of any financial market in the world. Forex exchange rates tend to react with extreme volatility to economic news releases and do so virtually instantly, sometimes even before the data is released. This makes the Forex market one of the most accurate reflections of world economic health.

There are a wide range of economic variables that impact currency exchange rate fluctuations including the trade balance, inflation, GDP, employment levels, trade deficits or surpluses and more. Generally, when such economic data is released, the Forex market will exhibit volatile fluctuations that can range from a meager ten pips to as much as a few hundred pips.

The movement is usually caused by data that is unexpected in comparison to forecasted figures. In other words, if actual employment numbers are lower than forecasted figures, then there will a significant weakening of the currency in question. Likewise, if consumer confidence is higher than expected, the currency will strengthen.

However, the Forex market does not always move as expected, which is where market psychology plays an important role. Next, we'll take a look at the power gained when you know what to expect from the Forex unexpected.