August 15, 2022

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On highly liquid markets like the foreign exchange (forex), external factors can significantly impact currency...

On highly liquid markets like the foreign exchange (forex), external factors can significantly impact currency values, and cause rapid movements in market performance.

Currency values are highly vulnerable to these factors, which can include inflation rates, political instability, trade relations, and so much more.

One pivotal factor occurring recently, is the cost of living crisis in the UK. This continues to impact the forex market, creating multiple ripple effects on currency values, and overall market performance.

To be a successful forex trader, you must not only be highly alert of these external factors, but be fully aware of exactly how they are impacting your trades.

When using an expert trading platform – such as Skilling, for example – this can enable you access to thorough market analysis, where you can observe these changes taking place first-hand, and adapt your trading approach accordingly.

In light of this, this article will take you through the rise in cost of living, and how it is affecting your trades on forex, to give you a more informed basis on which to conduct your trades.

What is the cost of living?

The cost of living is essentially a measurement of how expensive it is to live in a particular place. The ‘living’ is usually categorised as being able to afford general necessities. This means, how expensive it is to afford things such as food shopping, house costs, taxes, healthcare, and various other general goods or services.

In places that have a high cost of living, wages are expected to be equally high to match it. However, when the high cost of living is not met with sufficient wages, the expense becomes unmanageable for the average household income, and this is where a cost of living crisis occurs – as seen currently (at the time of writing) in the UK.

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Where a cost of living crisis is present, you’ll often find increased inflation rates. A simple way to view inflation, is how much you can get in a bag of shopping for a specific amount of money, and how this changes over time. For example, if £10 in the shop buys you less total goods than it did last month, then you know inflation is increasing – and vice versa.

This is vital information for forex traders, as the cost of living is essential to the performance of the forex market.

How has the cost of living in the UK affected forex?

In the UK, the rate of inflation reached a 30-year high of 6.2% in March, not seen since the 7.1% in March 1992. This drastically increased inflation is predominantly a result of Russia invading Ukraine.

For instance, due to trade sanctions being placed on one of the most prominent countries in Europe’s energy imports – Russia – energy prices have skyrocketed.  On April 1st, Ofgem increased the energy price cap by 54%, meaning an annual rise in direct debit bill payments, of around £700.

Also, the ongoing inflation rise is partially due to the country’s state in the aftermath of the pandemic. There are still shortages in staff across a wide number of sectors, and many businesses struggling to stay above water. Nevertheless, April 1st saw an incremental benefits rise of only 3.1%, compared to inflation which is potentially due to hit 8%.

As you can see from these examples, there are many factors contributing towards the UK’s mass inflation rise, with UK citizens not possessing the adequate incomes to manage it – thus fuelling the cost of living crisis.

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Naturally, this has resulted in the UK’s currency – the Great British Pound (GBP) – significantly decreasing in value, as seen on the forex market.

The GBP has seen a major decrease in value against the US Dollar (USD), such as on February 23rd when the GBP sat $1.35, before beginning a rapid descent that landed it at $1.30 on March 15th. Evidently, the rising inflation and higher cost of living has taken a toll on the GBP, due to weak economic stability.

To counter this uncertainty, Chancellor Rishi Sunak addressed the cost of living crisis in his spring statement on March 23rd, promising to ‘stand by’ working families, and get inflation ‘back under control’ by 2024, with plans for fuel duty and tax cuts.

However, it would seem this did not instil much confidence in investors, for the rate of inflation is still set to peak 8.7% by the end of the year, and the GBP began to steadily fall on March 23rd, moving from $1.32 to 1.30 in one week.

Therefore, it’s clear that the cost of living crisis is causing significant decrease in the value of the GBP, and despite attempts to tackle the rising inflation, signs of economic stability still seem far off.

Consequently, forex traders can expect a struggling performance from the GBP, and by keeping a close eye on the cost of living crisis, can tune their trades to profit from these currency value movements.

Whether you’re a fully experienced expert, or a beginner trader in the forex trading world, it’s essential that you maintain a keen watch on the UK’s cost of living crisis, to make the most accurate predictions, and execute the most strategic trades.

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