Does economic shift affect forex market liquidity?

forex market liquidity

Market liquidity is crucial for all financial markets, including the forex market. The foreign exchange market is one of the world’s largest financial markets, with an average trading volume of more than 5 trillion dollars daily. 

Hence many factors contribute to its liquidity, among which economic shifts are one not to be missed aspect. Hence this article will let you know what economic shift is in general and how it affects the liquidity of the forex market liquidity. So stay tuned 

What is an economic shift? 

Economic shift refers to a state’s or world’s economic system structure change. This often results in changes to structures, societies, and everyday life on a national or global basis.

Many factors are responsible for this change, such as politics, technological advancement, demographics, legal compliances, social change,  progress, and newly made economic policies. 

How does it affect the foreign exchange market’s liquidity 

Following are some of the significant factors of economic shift that have significant impacts on the liquidity of forex markets 

Economic statistics that affect the forex market 

Gross domestic product (GDP): 

Economic reports are the backbone of the playbook of foreign exchange traders. It maintains an economic report calendar to stay connected with the outside world and cope with fast-paced changes. 

GDP, which stands for Gross Domestic Product, is the amount of all the goods and services produced within a nation during a specific period (usually one year); it is another significant indicator that affects the forex market’s liquidity. 

It is the baseline of a country’s monetary performance and economy. Yet, it is crucial to know that GDP is a lagging indicator. That means it reports on specific events and trends that have already occurred in foreign exchange markets. 

Inflation rate 

Inflation is the second most significant indicator that affects liquidity as it sends signals of increasing prices and falling purchasing power. Nevertheless, it is a double-sided sword at the same time as it places downward pressure on the state currency appreciation. 

Therefore, central bankers may be forced to increase the rates to curb rising inflation. All in all, inflation is considered a hotly-contested issue among economists regarding forex, as its effects on currencies are rarely straightforward.

In addition to other factors such as retail sales, employment, and unemployment levels, manufacturing indexes and capacity utilization also carry important information on a country’s currency’s current and predicted strength that directly affects the forex market and its liquidity. 

Final verdict

On the bottom line, the liquidity of the forex market is ultimately driven by various economic factors that affect the value and strength of a country’s currency. The same is why the economic outlook has the most influence on its currency value. 

Knowing all of the economic indicators and factors can help one keep an eye on the fast-moving and competitive world of foreign exchange. However, one must shake hands with one reliable and very well reputed broker such as the HD market for entering the market to avoid all risks of harm.