The foreign exchange market serves as the global marketplace for purchasing and selling currencies. It stands out as the largest and the most liquid financial market globally, attracting participants such as financial institutions, banks, corporations, governments, and retail traders. The primary purpose of the FX market is to support global trade and investment by allowing the exchange of one currency for another.
Following the Covid-19 pandemic, 2023 has been another challenging year for the global economy due to high inflation and military conflicts. Which has caused ripple effects in the market. It is likely 2024 will remain a highly volatile year for currency traders. And while volatility is typically associated with risks, it can also bring many trading opportunities. Representatives at FirmFunded told us that using high leverage in highly volatile markets is super risky and instead, traders with limited resources and good skills should seek funding from Proprietary firms instead.
Macro-Economic Factors Affecting FX
It is highly challenging to predict what will happen in the financial markets, because there are so many components that go into price creation. Various factors can have different degrees of impact on particular currencies. In addition, some currency pairs are correlated with one another. What’s more, even when you do everything right and make a perfect prediction including all the factors, you can never be guaranteed that the price will change as predicted. However, informed decision-making is key to success in the markets and financial analysts typically include economic and political data in their analysis.
Economic Factors
Economic factors play an important role in determining the strengths of any given currency. Those factors include:
- Interest rates and inflation: interest rates are set by central banks, which gives them the ability to control money supply into the economy. Central banks all across the globe have one job to keep inflation in stable and low levels. To counter the pandemic, governments took huge loans and printed lots of money that increased inflation. In 2024, inflationary processes are likely to continue and central banks are likely to keep high interest rates all around the globe.
- Trade Balances: trade balance is an important factor when it comes to predicting the strength of a currency. The US economy shows the tendency of increasing trade balance. The country’s deficit gradually grew from -446 Billion in 2013 to -945 Billion in 2022, and is likely to keep growing for 2024. Negative trade balance is generally bad for the national currency and vice versa. As for Europe, the continent managed to overcome the energy crisis caused by Russia’s war in Ukraine. In the Eurozone, the trade balance switched from -28.7 (in October 2022) Billion Euros to a surplus of 11.1 Billion Euros in October 2023.
- Commodity Prices: Soft and hard commodities such as oil, natural gas, corn, wheat, soybeans, etc. have a substantial impact on currency markets. Producer countries and their economies benefit from increased prices, while consumers suffer. Prices on energies such as oil and natural gas have stabilized, but remain high.
- Technological and Market Developments: drastic improvements in technology have the ability to disrupt financial markets. For instance, increased adoption of electronic vehicles (EVs) can lead to decreased demand on oil and impact value of oil producer countries such as gulf countries and Canada. The Canadian Dollar suffers when oil price drops as the country is one of the major oil exporters.
Political and Geo-political Factors
In addition to economic factors, there are political and geo-political events that can have significant impact on currency valuations. The most important events to keep an eye on in 2024 are:
- Upcoming elections in the United States: the presidential election in the United States will have a significant impact on the value of US Dollar and its correlated currencies.
- Elections for the European Parliament: the main governing institution in Europe is the European Parliament and its elections will definitely impact Euro, and the British Pound Sterling since Euro and GBP are correlated currencies.
- War in Ukraine: the extension of the war means that more resources need to be spent on war instead of the economy and the western governments will have to find ways to help Ukraine win the war, which can have its toll on their respective currencies.
- War in Israel: the conflict in Israel is not affecting global FX markets substantially yet, however, if the conflict expands and neighboring Muslim countries decide to participate in the war against Israel, it can create a huge impact on foreign exchange and global economy. First of all, wars tend to increase energy prices globally, in addition, the participant countries and their economies suffer as wars require lots of resources.
While political and economic challenges pose a threat to international investments and possibly lead to a bear market, they lead to increased volatility in the markets and high volatility can bring many trading opportunities.
The Role of Put Options in FX Trading
A put option is a type of financial instrument that gives its holder the right, but not the obligation, to sell a specified amount of an underlying financial asset at a predetermined price within a specified period of time. Put options can have underlying assets from various asset classes.
Selecting the Best Put Options
When it comes to selecting the best put options for 2024 to keep an eye on, the most active ones can be currency options of Euro, USD, GBP, Swiss Franc (CHF), Swedish Krona (SEK), Norwegian Krone (NOK), Danish Krone (DKK), Hungarian Forint (HUF), Canadian Dollar, and Israeli Shekel.
Trading put options involves a certain level of risks, which is why it’s important traders to diversify their risks, set clear objectives, educate themselves and research markets diligently to find the best opportunities. .
Wrapping Up
To sum it all up, FX markets are influenced by global economic, political and geo-political events. And 2024 is likely to be a highly volatile year for FX traders. However, volatility can be beneficial for market speculators that trade currencies and put options on FX. The European continent is likely to be influenced by the Ukrainian war for 2024. And we have elections in both Europe and the USA, which will also impact the value of the Euro and the US Dollar.
