As any currency trader worth their salt will know, part of what makes forex trading so engaging is the volatility of the markets. While there is a degree of risk with volatile markets, namely that the value of an asset will go down, this also means that there are corresponding opportunities for that asset to have an upward price movement. For the savvy investor, that means you can use the price fluctuations brought about by volatile markets to lock in superior returns on your trades with XM Broker. That is particularly true of the currency markets, where not only are the markets highly liquid, but the prices and values of currencies are also tied to any number of events going on around the world daily. Whether it is the announcement of a new trade policy for a particular country or a catastrophic weather event, it doesn’t take much to make the needle move on the forex markets!
But what tends to cause price fluctuations in the currency markets more generally? And, more specifically, what causes the pound sterling – or the GBP – to rise and fall?
Before we go into more detail on this, however, we first need to remember that the GBP is one of the most actively traded, liquid currencies around. That is the case for both historical and practical reasons, with the GBP being not only one of the oldest currencies around, but also being tied to one of the most powerful currencies in the world. That means in terms of the total number of currency pairs out there, the GBP will, given its strength and stability, form a large percentage of them.
Beyond this more general feature, the GBP will rise and fall for several other more specific reasons. One of them is the policy of the central bank. As the issuer and guarantor of the pound sterling, with the power to both issue the currency as well as to set the interest rates on loans from the central bank to national and international banks, any announcements relating to monetary policy will have an impact on the value of the GBP. In particular, if an announcement is perceived as showing a lack of confidence in the economy, the value of the pound will tend to fall, while if the news displays confidence, the value will rise.
Another significant factor on the value of the GBP relates to general political news. As anyone who has followed British politics over the last two years knows, any announcement pertaining to Britain’s departure from the European Union has brought with it fluctuations in the value of the pound sterling. That is because these political developments don’t just relate to politics, but also the future of the economy. And as the value of a currency is related to the confidence traders have in the economy the currency is tied to, it makes sense that positive and negative news will cause a rise or fall. For this reason, currency traders pay keen attention to the daily news headlines, hoping to spot a trading opportunity!