The Key Factors Behind Forex Rate Movement
Even though we all know that forex rates move up and down and will fluctuate over time, there is not necessarily a broad understanding among the masses as to why exchange rates between various currencies move the way they do.
So for at least those interested in becoming actively involved in trading forex, there should be a basic understanding of how the overall system works.
The first fundamental principle to understand is that, like any other market, the forex market operates on a basis of supply and demand. As demand for a currency goes up, so does the price. If there is more currency available than takers, the price will fall. Basic market dynamics are at work.
While understanding basic supply and demand is pretty straight forward, the hard part to understand is that there are a whole host of factors that collectively influence forex exchange rate movement, and the interplay of these factors can be very complex to say the least.
For this discussion, we can boil down the major source of exchange rate influence into three groups.
The first group is economic factors. There are many individual factors within this group including but not limited to a country’s budget, financial policies, and trade account performance. Unless you’re an economist, it’s very unlikely that you can reasonably make sense of the interplay of this very large group of factors on the country’s exchange rate. The most important takeaway here is that a strong economy is necessary for a country to have a strong foreign exchange rate.
The second group is market psychology. While the economic group is more facts and figures based measurement of various indicators, market psychology is based more on people’s perceptions of what will happen with a given currency and the resulting actions they follow through in their trading activities will impact supply and demand of the currency and ultimately the actual exchange rate.
Of course, like the economic group, there is more sub factors involved and greater underlying complexity to consider from the market psychology group
The third major group of factors is political conditions. There can be a strong or lose tie in here with economic factors. For example, an unstable political environment within a country will tend to result in a weaker economy which in turn will negatively impact the foreign exchange rate.
Of course the opposite is also true in that political stability tends to promote a stronger economy which will strengthen the currency.
While this is a very brief overview of the three main groups of factors that influence the foreign exchange rate of a particular country’s currency, it still serves to demonstrate that even if you are just focusing in on these macro level groupings, you are likely going to be able to gain insight as to how a given country’s exchange rate may fluctuate.
The more you pay attention to the news and other information regarding the economy, politics, and public opinion, the better you’ll get at spotting trends before they develop.
Technorati Tags: Forex Rate Movement
More FAP Turbo, IvyBot, and Megadroid | Forex Trading R Articles
<< Back to FAP Turbo, IvyBot, and Megadroid | Forex Trading R Product Reviews
|