The foreign exchange (forex) market includes the buying and selling of the world’s currencies and is one of the most actively traded financial markets in. Despite its popularity, you might be wondering what is forex trading and how can you invest in currencies?
Today, the forex market is more accessible than ever, since you can open a position using an online trading platform and speculate on some of the world’s major currency pairs.
Some of its popularity can be accredited to the fact that the forex market can experience periods of high volatility, caused by a variety of external factors. These can include, but are not limited to:
- Economic data releases
- Political events
- Increased inflation rates
- News releases
Prices in the forex market fluctuate constantly, and whilst this presents traders with opportunities to profit, it also puts them at risk of making losses.
If you’re considering investing in the forex market in 2022, then we will guide you — by taking a look at some of the potential factors that could drive the market this year.
Keep reading to find out more.
COVID-19
Going into the third year of the pandemic, it would seem the virus is still wreaking havoc around the world. The most recent update was the emergence of a new strain — Omicron — which forced countries to reinstate restrictions and, in some cases, lockdowns.
In December 2021, the UK recorded its highest number of daily cases of nearly 130,000, as Omicron ravaged the nation. This has caused several industries to struggle, as many of their workforces have been forced to stay at home, self-isolating as they had tested positive.
Moving forward in 2022, much of the UK is lifting the previous restrictions, with England completely scrapping its ‘Plan B’ rules.
The impact that COVID-19 could have on the forex market this year is, therefore, dependent on the nation’s ability to learn to live with the disease and maintain economic momentum in all sectors. This, of course, would be disrupted if another new strain of the virus were to emerge.
Interest rates
Interest rates are a primary factor that can drive prices in the forex market. This is because, when a nation experiences higher interest rates, they typically attract greater foreign investment, which in turn increases demand for their currency, boosting its value.
The opposite scenario would weaken a currency. Therefore, it’s vital for forex traders to analyze fundamental data, like interest rates, to make well-informed decisions with regard to their investments.
A country’s interest rates are released periodically as part of the consumer price index (CPI). Through using an economic calendar, you can see when the next data release is scheduled, enabling you to plan ahead and prepare for any price changes that could occur.
Interest rates drive inflation, as lower interest rates indicate that national’s have more money aside to spend, boosting the economy and in turn, increasing inflation rates.
Inflation could be a major driver of prices in the forex market this year, because of the fact that consumer prices have increased to their highest levels in 30 years in the UK, US, and parts of Europe. This has been caused by the world’s economies re-opening after imposed lockdowns, and economic activity building momentum once more.
In fact, in the latest inflation data release, the UK recorded a 30-year high — rising to 5.4%. If inflation rates continue to rise, it’s likely that the landscape of the forex market could be affected, since this would cause prices to rise.
There are many factors that can affect the forex market, so it is recommended that you use an economic calendar when trading, to plan ahead for major economic events that could disrupt your position.
However, many events that could take place this year could be unprecedented, and whilst you can’t predict these, you can use a range of risk management tools in order to minimize the losses that you could incur.
