Economic downturns can have far-reaching effects on the international market, which is often regarded as the heart of the global economy. A recession, one of the most dreaded of them, can stir the FOREX market in unimaginable ways, from shifting trade patterns to fluctuating currency prices.
As a result, certain assets and currencies may become less in demand, which will cause them to lose value in comparison to US dollars and other currencies.
The effects of a recession are not limited to the FOREX market as it also brings about high levels of crime, hunger, unemployment, and financial catastrophe to any nation.
At this point, you might be wondering what recession really means.
Let’s take a closer look at this dreaded phenomenon, feared even by the most powerful nations on earth, and how it can affect the way you trade the financial markets.
What is a Recession?
Put simply, it’s a period of economic decline in which trade, tourism, industrial activity, and commerce reduces. Triggered by factors such as financial crises, natural disasters, climate changes, etc, it’s impossible to predict how long an economy will wallow in a recession. Depending on how well the GDP of an economy is managed, it could last months or even years.
When an economy’s activity is at its peak, a recession starts, and it ends when it’s at its low point.
Investors become increasingly risk-averse during a recession as economic activity slows and uncertainty rises. A country’s currency may also become less in demand as a result, losing value in comparison to other currencies. Plus, central banks may reduce interest rates to boost the economy, which can also affect the currency’s value.
How Recession Affects the FOREX Market
Recessions can boost volatility and speculative activity in the FOREX market as traders try to forecast the course of the economy and the value of the currencies. As a result, it’s important to closely monitor economic indicators and news (fundamental analysis) during a recession to make informed trading decisions in the FOREX market.
A recession might also cause volatility in the FOREX market as currency values fluctuate based on changes in economic conditions. During this period, investors may switch from investing in the currencies of recession-hit nations to safer options like the US Dollar, Euro, or precious metals like gold and platinum, government bonds, etc. when they become more risk-averse during a recession. This can lead to a decrease in the value of the affected country’s currency.
To succeed as a trader during this period, you need to approach the market by honing in on your fundamental and technical analysis skills and having a good understanding of the type of recession you’re dealing with.
In a global recession, the currencies of stronger economies are likely to gain in value in relation to those of weaker economies or those that are experiencing a harder recession.
Recession could also be short-term and localized rather than global. Short-term recessions are often the result of short-term political events. Think the Brexit referendum that sent shock waves through the financial market, causing a short-term contraction in economic production levels and plummeting the value of the Pound.
Wrapping up
A recession is an extended period of economic deterioration characterized by a decline in the GDP for two or more quarters consecutively. A recession’s impacts can be widespread and have a big influence on people, businesses, and the economy as a whole.
As economic activity slows and uncertainty rises, demand declines, asset values fall, and instability ensues, creating more uncertainty and volatility in the FOREX market. Recessions can also result in changes in interest rates, inflation, government spending, and international trade, all of which can have an impact on the value of a country’s currency.
Whether you’re new to trading or an experienced trader, trading FOREX during a recession involves establishing whether it’s localized or part of a global trend, knowing how to trade, and what to trade.
Start trading FOREX by opening an account, or practice first in a risk-free demo account.
