What Affects the Price of FX?
Bewlow will cover a basic list of factors that can affect the forex market from all over the global market
The Role of Macroeconomics in Forex
The forex market is primarily driven by overarching macroeconomic factors that influence the decisions of the traders who ultimately decide the value of a currency at any given point in time. The economic health of a nation's economy is an important factor in the value of its currency. Overall economic health, however, is shaped by numerous economic events and information that may change on a daily basis, contributing to the 24/7 nature of the international foreign exchange market. Let's take a closer look at some of the factors that influence an economy's standing and drive changes in the value of its currency.
The global capital markets are perhaps the most visible indicators of an economy's health, while stock and bond markets are the most noticeable markets in the world. With constant media coverage and up-to-the-second information on the dealings of corporations, institutions and government entities, there is not much public information that the capital markets miss. A wide rally or sell-off of securities originating from one country or another should be a clear signal that the future outlook (short term or long term) for that economy has changed in investors' eyes.
Similarly, many economies are sector driven, such as Canada's heavily commodity-based market. In this case, the Canadian dollar is heavily correlated
to the movements of commodities such as crude oil and metals. A rally in oil prices would likely lead to the appreciation of the loonie relative to other currencies. Commodity traders, like forex traders, rely heavily on economic data for their trades, so in many cases the same economic data will have a direct affect on both markets.
Influences on the Price of the Markets
There is an endless number of factors that all contribute and influence the prices in forex trading (i.e. currency rates) daily, but it could be safe to say that there are 6 major factors which contribute the most and are more or less the main driving forces for forex trading price fluctuation:
1. Differentials in inflation
2. Differentials in interest rates
3. Current account deficits
4. Public debt
5. Terms of trade
6. Political and economic stability
In order to best comprehend the above 6 factors, you will have to keep in mind that currencies are traded against one another. So when one falls, another one rises as the price denomination of any currency is always stated against another currency.
As one major forex market closes, another one opens. According to GMT, for instance, forex trading hours move around the world like this: available in New York between 01:00 pm – 10:00 pm GMT; at 10:00 pm GMT Sydney comes online; Tokyo opens at 00:00 am and closes at 9:00 am GMT; and to complete the loop, London opens at 8:00 am and closes at 05:00 pm GMT. This enables traders and brokers worldwide, together with the participation of the central banks from all continents, to trade online 24 hours a day.
How Forex Works
Forex trading is the simultaneous buying of one currency and selling of another. These two currencies make up what is known as a "currency pair". Currencies are always traded in pairs - each currency is represented by three letters. The first two letters represent the country and the third letter identifies the currency. Forex pairs are read in the opposite direction of mathematical proportions or ratios,
EUR/USD = 1.23700
The currency to the left of the is called the base currency (in this example, the Euro) and the currency on the right is called the quote currency (in this example, the U.S Dollar)
This notation means that 1 unit of the base currency (that is, 1 Euro) is equal to 1.23700 U.S Dollars
You have to pay 1.23700 U.S Dollars to buy 1 Euro
If selling, the foreign currency exchange rate specifies how much units of the quote currency you get for selling one unit of the base currency
In the above example, you will receive 1.23700 U.S Dollars when you sell 1 Euro