Forex basically stands for foreign exchange and the forex market makes massive volumes of trades every day. Unlike other traditional markets, forex doesn’t have a brick and mortar location. It’s rather traded electronically. So how does the forex market react to oil prices when oil is a commodity and this market deals with currencies?
Although it might not appear to be obvious at first, oil prices can have a dramatic impact on the forex market.
The forex market operates by trading pairs and the majority of the trading pair currencies in the market are from economies that are heavily dependent on the price of oil.
The oil price basically dictates how strong a country’s economy is, so it’s natural that oil prices will determine which way the forex market will move.
This is quite different from the currency market where central banks have a role in determining policy. In the forex market, the rules of supply and demand when it comes to crude oil, also apply here.
The economy and the oil prices are always closely connected. So if you are an oil producing country with a high volume of crude oil, high oil prices will have a positive impact on the economy and the currency. Low oil prices will benefit the countries that imports this commodity and not the nation that supplies it.
If the price of oil rises, the economy of the producing nation will become stronger. This will enhance the value of the currency. As a result, it will also be traded at a much higher volume on the forex market.
It’s always the same pattern when a currency is strong and rising, it will be traded more frequently and at higher volumes.
As mentioned earlier, it matters where the country stands when it comes to supply and demand. If you’re an importer and the price of oil shoots up, your economy will feel the negative impact of higher prices. The value of the currency will also fall, reducing the number of currency trades on the market.
For example, falling prices of oil has had a devastating impact on the oil producing nation, Venezuelan. On the other hand, some of the largest consumers of oil like the U.S. and Japan benefitted from falling prices and that had a positive impact on the U.S. Dollar and Yen.As a result, if you’re a beginner in the forex world, it’s important to note that you have to keep a close eye on the oil commodities market and the economic and geopolitical events that can impact oil prices.