Whether you are a trader or not, you’ll likely have heard of the economic situations across Europe, North America, and the UK, where currency prices are reaching new lows. For traders who analyze the market on TradingView, the market turmoil is apparent and generally impacts traders. As forex trading is an analysis-based prediction activity, traders must find the best way to trade the market to make profits and manage their funds well. There are different factors contributing to the market turmoil. This article covers the why and how of the current market situation, as well as offering predictions for the coming months.
What is market turmoil?
Volatility is an essential feature in the forex market. Without volatility, forex traders would find it almost impossible to make profits as they trade. But volatility has its drawbacks as it works both ways. Yet, traders prefer a volatile market with a clear direction, as opposed to ranging markets where there are no clear trading opportunities. In recent months, the prices of currencies have shown significant fluctuations, ranging from those hitting new lows to those hitting new highs. For example, the EUR, USD, and GBP are the most affected currencies due to their status and economic pull. In August, the EUR became equal to the USD in market parity, while the GBP hit a new 20-year low in September. The GBP is facing its most challenging time in nearly two decades, with its value falling against the USD and EUR.
Why market turmoil?
Understanding the market turmoil increases trading performance. Why is the forex market going through a challenging phase? Why do currencies have price fluctuations? Several important reasons exist, but these four are the most significant determinants of a currency's worth.
Energy and precious metals prices
Today’s economy is heavily reliant on energy. The manufacturing industry, services, and even consumers all rely on power. When energy rates increase, production prices also increase, putting a strain on consumers, who have to pay more for goods and services. An increase in electricity and gas prices also impacts productivity as workers struggle with the cost of living. All these eventually reduce the value of a country’s currency. On the international level, certain currencies correlate with oil and gas prices. For example, oil and gold prices impact the prices of CAD, UAD, JPY, and NZD because those countries either export or import oil and gold.
The inflation rate is another critical factor in the current market turmoil. A higher inflation rate reduces the value of a currency and negatively impacts the economy by reducing purchasing power. Although stable inflation is necessary for a good economy, the rising inflation rate reduces the profitability of international trade. For example, if inflation rises, consumers have reduced buying power, and the currency is devalued, leading to several unpleasant situations, such as price falls and lower returns on lending.
The monetary policies of a country’s central bank also impact the value of its currency. Economic policies are those targeted at regulating financial supply and flow and growing the economy. Thus, central banks typically roll out regular lending or interest rates to reflect currency inflation levels and keep the currency’s value up. For example, the Bank of England hiked the GBP's interest rate in August to respond to the rising inflation rate. Higher interest rates increase the demand for a currency and could increase its price in the forex market.
The forces of demand and supply also impact the value of a currency. If the demand for a currency increases, its value increases too. A higher interest rate is one of the many factors that could increase the demand for a currency. Investors’ confidence in a currency determines whether they will go long or short when trading. If traders are confident of a price increase, they will likely go long and take profitable positions. But the reverse usually happens if traders are convinced of a price fall.
What to expect: Predictions for the coming months
The forex market is bearish, but it is not the only one. Other financial markets, such as the crypto market, are also bearish. Here’s what to expect in the coming months:
GBP to fall
The GBP is expected to fall to lower levels in the coming months. The UK is battling record-high inflation, as well as housing and energy crises, which have all impacted the value of the GBP. The increased lending rates have not affected the fall of the GBP. The new PM is expected to roll out several mitigating measures, but analysts still expect the GBP to hit low levels in Q4 2022 going into 2023.
EUR may appreciate
The EUR surrendered parity, hitting lower levels for the first time in two months. Analysts believe the ECB's monetary policies may be enough to jumpstart the Eurozone economy and increase the value of the euro. The opening of a new gas pipeline may increase confidence in the currency.
Market turmoil may even out
Looking ahead to 2023, the current market turmoil may worsen if economic policies arrest inflation and boost the economy. Another crucial factor is the performance of the stock market and mortgage-backed securities. The sensitivity of certain currencies to the stock market underlines the importance of the latter’s performance to forex traders. A stable and positive stock performance, lower energy prices, and higher lending rates may be enough to alleviate the market turmoil in 2023.