What influences FX markets?

Hello, my name’s Ollie Pryke from Barclays’ Corporate bank foreign exchange team. Today we’re going to look at what drives foreign exchange rates.

As you can see from the slide, you can split it up into four main areas. These are: geopolitical events, economic fundamentals, market flows and finally technical analysis. We’ll have a chat through some key points in a bit more detail now.

If we look at geopolitical events, essentially markets don’t like uncertainty or factors that impact the stability of an economy. Recently, the FX markets have seen a lot of political unrest, with Britain’s EU referendum and the subsequent change in Prime Minister causing a sharp depreciation in Sterling. This has been followed by a period of uncertainty with a prolonged negotiation process expected.

In Europe, we have seen a rise in populist parties and with key general elections in 2017, these events pose a risk to the political stability of the area and the value of the euro. In the US, we have seen a rise in nationalism, driving an unexpected Presidential election result, and the ensuing protectionist policies may well impact global growth whilst having implications in foreign exchange markets too.

If we now consider economic fundamentals, the most important economic fundamental for FX markets has been interest rates. In a world where major economies’ interest rates remain at historically low levels, the market is looking at central banks for signs of which economic area looks set to raise rates next and the relative rate hike path of each one. Given that, inflation and unemployment reports are really significant as the strength of these will lead to potential tightening of monetary policy in these regions. 

Elsewhere, the balance of payments – particularly in oil exporting nations – has been key. With the continued pressure on oil price, a lot of commodity exporting currencies have weakened significantly.

Currency markets are driven by flows from one currency and into another. This can be particularly important in risk-off scenarios where investors’ money floods to safe-haven currencies. In FX terms, that generally means a strengthening of the US Dollar as we have seen after the recent US election result.

Mergers and acquisitions activity also impacts FX markets, given the effects on supply and demand they have, particularly at the jumbo-transaction level.

Thank you for listening, if you want any more information please contact your Relationship Director or your usual FX contact at Barclays or visit barclayscorporate.com.