Forex Market Drivers

The Forex market is driven by a number of fundamentals, including interest rates and the prices of commodities such as gold and oil.

Rising interest rates strengthen that country's currency

A common way to think about interest rates is how much it's going to cost to borrow money, whether how much we pay for our mortgages or how much we earn on our bond and money market investments. Interest rate policy is a key driver of currency prices and is a popular trading strategy for new currency traders.

Fundamentally, if a country raises its interest rates, its currency prices will strengthen because the higher interest rates attract more foreign investors.

For example, higher rates in the Eurozone may prompt U.S. investors to sell U.S. dollars and buy bonds in Euros. Similarly, if interest rates increase in Switzerland, those investors may decide to sell their Euro-bonds and move into bonds in Swiss francs (CHF), driving Euros down and Swiss francs up.

When gold goes up, the USD goes down (and vice versa)

Historically, gold is a "safe haven", a country-neutral investment and an alternative to the world's other reserve currency, the U.S. dollar. That means gold prices have an inverse relationship to the USD, offering several ways for currency traders to take advantage of that relationship.

For example, if gold breaks an important price level, you'd expect gold to move higher. With this in mind, you might sell dollars and buy Euros, for example, as a proxy for higher gold prices.

Rising gold prices help major gold producers

Australia is the world's third largest exporter of gold, and Canada is the third largest producer worldwide. These two major currencies tend to strengthen as gold prices rise. You might consider going long these currencies when gold is increasing in value, or trade your GBP or JPY for these currencies when gold is on the rise.

Oil-dependent countries weaken as oil prices rise

Just as airlines and other oil-dependent industries are hurt by rising oil prices, so are the currencies of oil-dependent countries like the U.S. or Japan, both of which are massively dependent on foreign oil.

If you believe oil prices will continue to rise, you can consider buying commodity-based economies like Australia or Canada or selling oil-dependent currencies.

»Next: Economic Indicators 101