The Foreign Exchange market, also known as FX or FX market, allows banks, investors and individuals to buy, sell or exchange currencies. As the most extensive and complex financial market in the world, the daily trading volume for forex has crossed $ 6 trillion. The Forex market comprises of investment management firms, commercial companies, banks, currency brokers, and investors.
The 24/5 forex market
FX market is referred to as the 24/7 market as it remains open at all hours of the day and night around the globe. The trading hours start off Monday morning, but as they do close down on weekends, it is not a 24/7 market, to be accurate. But there is always a market open 24 hours a day, and London and New York are the two busiest time zones as the two trading sessions can overlap.
Traders should take into account the different time zones when trading, as things tend to get a bit complicated because of the time difference. Many traders often struggle to calculate the precise working hours of the market because of the time zone difference. The majority of traders create a valid setup within the first few hours of a market and use it to determine the direction for the rest of the day. Nevertheless, it is not a good idea to trade 24 hours a day.
The main function of the forex market is the transmission of purchasing power from one country and one currency to another. It provides credit facilities for both importers and exporters, plus the provision of hedging facilities that covers the foreign trade risks.
USD is the most traded currency pair followed by Euro as its closest rival. Thus, any events in the US are bound to impact the currency rates across the world. Foreign exchange made headlines in recent times due to the COVID-19 crisis that triggered major disturbances in global capital flows.
Major Economic Consequences Due To COVID-19 Outbreak
COVID-19 outbreak has prompted major economic and financial consequences around the world. GDP has already contract by 6% and FDI flows and trades are expected to fall further. The new financial conditions have impacted the capital flows across countries and influenced the forex markets and currency trading as following.
- Sharp swings in foreign exchange
- Steep decline in oil prices
- Acceleration in currency depreciation
- Cross-border portfolio investment became immobile
The currency markets take a few weeks or months to recover after having been disturbed by the pandemic. The countries need to improve their control of the capital flows and make policy shifts before they see any improvement in the FX.
Inflation and currency value
Inflation is one of the many factors that influence a country’s exchange rate, and the inflation negatively impacts the value of a country’s currency. The currency rates are a good prediction of inflation. There is a complex interrelationship between the inflation rate and the interest rates that are difficult to follow.
Countries try to maintain a balance interest rates and inflation. While lower interest rates increase consumer spending and may cause inflation, they fail to attract foreign investment. On the other hand, higher interest rates entice foreign investment and the demand for a country’s currency. However, other factors, such as economic growth, the perceived desirability and stability of the government influence the value of a given currency.
Trading markets can vary, and most traders and brokers focus on safer commodities and currencies while others look for leverage opportunities such as the shifting demand for crude oil. It can be difficult to understand the jargon of the forex world and terms like spot, forward, today, tomorrow and so on. Therefore, before you invest in forex or look for investment management, try fx trading brokers and financial advisors. One must always remember that it takes time to get the hang of the forex market, which is full of uncertainties, risks, and fluctuations.
Forex speculation, forward and spot trading
It can be tricky to understand the nuances of Forex trading such as spot FX, FX forward, currency forward and more. For beginners, it is highly recommended to get familiar with the basics of the trade and take advantage of resources such as currencybrokers.co.uk that offers a more holistic idea of how forex works, what to avoid and what to use.
There are different brokers such as fx trading brokers for speculation as opposed to currency brokers who provide spot and forward FX for payment purposes. Spot is buying of and selling of one currency at an agreed rate whereas Forward transaction involves trading on currency against another. Forward payments allow one to lock in an exchange rate at a pre-specified date in the future. Commercial banks who run forward exchange business may use a swap operation to adjust their fund positioning.
The major pull factor for traders towards forex is the profit potential, and this is why more and more people are looking for new income channels. Although forex presents a unique opportunity to make a profit, one should keep in mind the risks and volatility in these markets.
The first step in forex trading is to educate yourself about the market and how it works. New traders with limited funds must start with small amounts and focus on understanding the fundamentals that influence currency values and technical analysis. Based on the finances and risk tolerance, develop a trading strategy for the FX market and alter open a brokerage account.