Success in the foreign exchange market can only be attained if one is to take into consideration all the forces that influence the behavior of the currency market. As such, every forex traders should take heed of oil and its immense influence over the foreign exchange market as a whole. The price of oil has always been a vital gauge of the world's economy not only because the modern world is heavily reliant upon petroleum but also because the level of oil prices affect the performance of major financial markets such as the forex.
Oil as one of the world's main energy sources holds huge influence on almost every country. Therefore, world oil price is one of a handful of economic indicator that is indirectly influencing every country's economic condition. It is further reflected in the financial market as the country's currency is appreciated or depreciated following oil prices ups-and-downs. However, the correlation is highly dependent on the condition of world oil market and it could change accordingly.
As already explained, strong economies have strong currencies, and most of these economies are strong because of oil. This means that the economy will either strengthen or weaken depending on what is happening to the oil price. Since currency trading is done by using currency pairs, oil prices will affect some currency pairs more than others. For example: Canada has become a big producer over the years while Japan is a significant importer of crude. This means that if oil prices changes will quickly affect the Japanese currency because the country has an economy that is dependent on oil.
Economies that are dependent on oil will be affected by high prices, as these high prices will be transferred to the supply chain ending up in very costly commodities. This has the effect of reducing the value of the currency of a country. To answer the question of whether oil market affects forex prices, yes it does although to a less or greater extent based on the currency pair. Some currency pairs will be more influenced by the oil price than others.
The future of crude oil is uncertain as of now and there are many different directions and outcomes we can expect to see in the following days, weeks and months. So basing from this argument alone, it’s easy to see that there are a number of factors that come into play in the forex trading arena. There are many factors that influence the behavior of the foreign exchange market but none can claim to be as influential as oil prices whose even the slightest movements are certain to rock the currency and the foreign exchange market as a whole.
