For traders, there are numerous factors that can shape the performance of foreign currencies. Look at the British Pound (GBP) as an example. The impact of Covid-19, economic recessions, and Brexit uncertainties all influenced GBP’s market performance. But some factors are easier to overlook. Did you know, for example, that housing data can also influence forex trading?
It’s no shock that traders – not least the less experienced ones – can feel overwhelmed when confronted with the sheer volume of data that can make or break a forex investment decision. At the same time, however, it’s essential for traders to know what will have an impact on any given currency. And, as we’ll explore why, housing market data is one factor you can’t ignore.
What is forex trading?
From additional income generation to genuine investment vehicle, FX trading has increased in popularity in recent years. It’s an over-the-counter (OTC) market that’s open to all-comers; buying, selling and speculating on world currencies. Unlike more conventional markets such as a stock index, the global forex market operates 24 hours a day, five days a week.
In 2019, the Bank for International Settlements announced that global daily currency turnover had reached a record US$6.6 trillion. This is even before Covid-19 – and the lockdown rules to come with it – had fuelled an increase in day trading during 2020. With currencies having their own distinct and idiosyncratic driving forces, there are plenty of chances for traders to profit.
Using housing data in forex trading
It’s not uncommon for economic performance indicators like inflation and GDP growth to pull a currency’s strings on the global market. But where does housing market data come in? Well, it remains one of the most visible indicators of an economy’s strength. At its most basic level, an increase in house prices has a close correlation to consumer confidence and spending.
Central banks will intervene in the housing market – whether it’s to drive or control growth. In controlling growth, a common way to do this is through the setting of interest rates. Putting up interest rates is designed to remove liquidity from the market. But this can also attract foreign investment, which drives up the value of a currency. If rates are cut, the opposite applies.
The prospects for the UK housing market
It’s also worth noting that lower interest rates means that it’s more affordable for people to buy a home with a mortgage. In the past few years, have reached record lows. In response, we can see a prolonged and some may say unsustainable rise in house prices. For all the economic and political challenges of 2020, however, this growth has remained unchallenged and unwavering.
Looking ahead to 2021 and what this means for forex trading, all eyes are currently on how the market responds when a stamp duty holiday ends on 31 March. Early indications are that prices are already starting to dip, which will be sure to have an impact on the value of GBP. But is this just a dip below the unsustainable growth seen in 2020 – or more dramatic collapse?
Time will tell. And forex traders must take a real interest to maximise their investment in 2021.