There are many factors that can influence the overall health and outlook for any given economy and indeed the global economy. Currency markets, more than any other financial market, trade on the back of news from many sources.
• Politics - both within a country and in the international domain
• Central bank intervention (individual or collective) - recently, central bank intervention has been focussed on ensuring smooth functioning of the market, rather than defending a level.
• Risk appetite - when investors are seeking to extend ‘risk', the response to changing fundamentals can be greater than usual
• Positioning - if investors have already positioned for improving fundamentals (eg are holding a long position) then the currency may not strengthen further on a robust economic report, and equally could fall more than expected on disappointing news. The opposite is true for a market positioned on the short side.
• Natural disasters - for example, a hurricane in the Mexican Gulf can impact the price of oil, which is negative for economies that rely on imported oil
• Commodity cycles / Global growth
• Purchasing Power Parity - an economic theory that the price of goods in one country should equal the price of those goods in another country, exchanged at the current fx rate (the law of One Price).
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