PureFX

What Does ‘Reaction on The Foreign Exchange Market’ Mean?

Tue 3rd April 2012

In this post I’d like to talk about what a ‘reaction on the foreign exchange market’ means. I hope this will be helpful if you thinking about changing currencies, and want to know more about the best time to do it.

Foreign Exchange Reactions

When we talk about a ‘reaction’ on the foreign exchange market, we’re talking about the countless investors involved in foreign exchange that determine the value of each currency. It’s these people who ‘react’, which then leads to a change in the value of one currency against another. Perhaps the best way I can illustrate this would be with an example.

For Example...

One morning then, the UK government might reveal that the UK economy expanded 0.5% in the three months between Jan and March. If the investors on the foreign exchange market forecast less, then that’s superb news for the UK economy, and signals that growth is proceeding at a much faster rate than expected.

In consequence, that release is likely to prompt a ‘reaction on the foreign exchange market.’ In this case, the pound sterling is likely to look a lot more enticing to international investors, causing it to gain in value. That might mean that, while the pound-to-euro rate had been 1.19, it might go up to 1.20. That’s great news if you’re buying euros.

But In Fact...

This though is just one example. In reality, there are countless economic and political events occurring all across the globe on a constant basis, each of which causes a reaction on the foreign exchange market. The size of the reaction depends on the importance of the news. How the market reacts meanwhile depends on what is happening at the time. I’ll illustrate this with another example.

One More Example...

Imagine for instance that there’s an earthquake in a major industrialised nation (bit morbid I know!) If this happened, it would prompt an immediate panic on the foreign exchange market, as investors sought to compensate by putting their funds in the safest locations possible. Hence, strong and stable economies like the US and Japan might benefit, even if the earthquake affected them.

(In the aftermath of the Fukushima disaster in Japan for instance, the Japanese yen soared, because it was considered a safe haven in spite of the fact it was a Japanese crisis.)

Find Out More!

Furthermore, this earthquake would not just impact stable economies: it would cancel out other economic and political news to some extent. If there’s an international crisis then, the extent to which the UK economy expanded is likely to look less important. Hence the ‘reaction on the foreign exchange market’ would be smaller.

I hope I’ve shown you how reactions on the foreign exchange market are interconnected, depending on what’s happening and where across the globe. Of course, if you have any questions about this topic, please don’t hesitate to get in touch! You can call us at +44 (0) 1494 671800 or email enquiries@purefx.co.uk.