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Economic Growth - Price Drivers ContinuedEcnomic Growth = Higher Interest RatesEconomic growth is a great factor to consider when trying to predict a country's currency movements. The stronger the economy, the greater the possibility a central bank will raise interest rates to tame the growth of inflation.Successful trading is all about being able to predict which direction the value of a currency is likely to take. The higher a country's interest rates, the better the likelihood investors will invest in a country's financial markets. More investors means a greater demand for the country's currency. A greater demand results in an increase in a currency's value. So what we get is a ripple effect - a growing economy leads to higher interest rates which inspire more foreign investment, which inspires greater currency demand which translates into an increase in the currency's value. Putting It Into PracticeAn excellent example of the impact of growth on the direction of currency rates can be seen by looking at the EUR/USD from 2005 to 2006. This growth is best measured by a country's Gross Domestic Product, or GDP.The United States and Eurozone represent two of the most prosperous regions in the world with GDPs running at roughly $13 trillion and $11 trillion respectively. In 2005 and 2006, the difference in growth rates between the two major economic powers was clearly reflected in currency movements. In 2005, the Eurozone lagged significantly behind the United States in economic growth, averaging 1.5% throughout the year while the US expanded at a 3% rate. As a result, investment capital flowed from Europe to the US and the EUR/USD dropped by nearly 2,000 basis points by the end of 2005. In 2006 Eurozone growth perked up while US growth began to slow. At the end of 2006, Eurozone GDP actually overtook US growth rates, causing the EUR/USD to rally. It's about long-term TrendsAs you know, the safest way to trade is to determine the trend and get aboard for the ride. If the long term trend is defined, any shorter term trades will have a greater chance of success.Prices may move against the trend, but will generally follow the longer term outlook, and a growing economy is a major long term price driver. Wishing you continued trading success,
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