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Oil and its Impact Upon the Forex Market

It is common knowledge, particularly among the forex veterans, that there are a lot of factors affecting the movement of currency prices in the foreign exchange market. Such factors range from the mundane such as breaking news to the simply devastating such as market crashes. One such factor which has a strong influence over the forex market as a whole is oil.

Now there are still a great number of currency traders, especially those who are still wet behind the ears, who still can't grasp the correlation between oil and the forex market. Such traders often ask:

Why would forex traders be concerned with the oil market when they are trading currencies, not oil?

As said earlier, oil has a very strong influence over the foreign exchange market as its price has always been one of the main indicators of the status of the world's economy. Because of this, movement in the in its price level sends shockwaves among the financial markets, including the forex.

So how does oil actually influences the currency market? To put it simply, having oil greatly influences the fate of a country's economy as those who have it will have economies that will be strong as they will profit much from exporting it to other countries. Conversely, those who do not have it will have to import from those who have, making the fate of their economies intertwined with its level of price of meaning they will benefit if the price level is low and they will lose when price levels are high.

If the economy of a country is strong or bad, so what? The health of a country's economy reflects upon the performance of its currency in the market as the two are correlated. If a country's economy is doing well, then its corresponding currency will be strong and stable while a laggard economy will have a currency that is weak and unstable.

Now a strengthened currency will makes it exchange rate with other currencies change as its value will increase. The same can be said for weakened currencies as their exchange rates will also adjust to their lessened value in relation to other currencies.

This correlation can be exploited for profit as one can focus on currencies that are from countries that have oil side by side with currencies that are from countries without. The pairing can be profitable as the exchange rate between the two is very much likely fluctuating most of the time.

Knowing the impacts of oil upon financial markets such as the forex is something only a fool will disregard, Because of this, anyone dabbling in currency trading should be familiar with its influence and should strive to anticipate the changes that would be brought when price levels of oil are fluctuating.