In order to become a successful forex trader, you will have to know everything concerning fx rates. These include how to calculate the rates and how to compare different currencies listed for trading. You also have to know the different factors that affect the values of currencies and how they bring about changes in the forex markets. It is this comparison of currency values that will determine whether you make profits or losses when you trade.
Currency values in the foreign exchange market are controlled by the forces of supply and demand. When a currency is in high demand in the forex markets, its value strengthens against others. The opposite is true for currencies that are in low demand. The demand for a certain currency in the markets will depend on the economic situation of the country behind the currency. Countries with well performing economies tend to have strong currencies in the market. This means that any factor that affects the economic performance of a country will affect the value of its currency, and subsequently, the fx rates in the markets. Forex traders are therefore very keen on economic indicators from different countries whose currencies are commonly traded in the forex markets.
Factors affecting forex rates
In order for the economy of a country to perform well, there needs to be relative political stability. This will enable the country to attract foreign investors. There will also be less interruption of business activities in a stable political environment. The government’s fiscal policy will determine the relative value of the currency. Whenever a government releases its fiscal policy for the coming financial year or a shorter period, the markets react accordingly as it determines whether its currency becomes more or less desirable. Traders are usually very keen on such news especially for countries whose currencies are heavily traded in the forex markets all across the world.
The economic outlook for any country is always changing as one event leads to another, making circumstances to change. When the economy is performing well, there will be low levels of unemployment and consumers will have more purchasing power. This will increase the demand for consumer goods and subsequently result in high inflation. The central bank of that country has to maintain inflation at a certain level so they may have to intervene at some point to keep inflation in check.
The central government responds to high inflation by raising interest rates. High interest rates result in less purchasing power for consumers and curbs inflation rates. Foreign investors love countries with high interest rates as it means they will profit more from their investments. The influx of foreign investors increases the demand for a country’s currency in the forex markets. This will make the value of the currency to strengthen in comparison to others paired against it. From this, it is clear that any changes in interest rates or inflation rates will eventually affect fx rates. As a forex trader, your duty is to understand how these changes will affect the rates so that you trade accordingly to maximize on profits or minimize losses.
Governments also trade with each other using foreign currencies. A country with a trade surplus means that it is exporting more than it is importing. This means that there will be high demand for its currency in the forex markets. A trade deficit is likely to weaken a country’s currency. However, governments have other intervention measures that they can institute to ensure that their currency remains strong even when there is a trade deficit. These are just some of the aspects you need to learn so that you understand fx rates better.