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The currency market or otherwise known as Forex is the world’s most traded market, attracting more than a trillion dollars of investment per day. This investment comes from large hedge funds, central banks and even small fish in the sea such as individual traders. They all do the same thing – speculate the price of one currency against the other. With such large daily investment Forex trading can be a bit if whirlwind for new comers because it is so volatile and fast-paced. With this in mind most new traders must wonder at some point; what is it that drives the movement in the market? Everyone is using Forex brokers and everyone is seeing the same prices and movement but how do they know what will move next and in which direction?
Every country’s currency is driven by its interest rate. In essence, as the interest rate of one country rises the same is reflected in its currency. As the interest rate increases you can profit from this by buying that currency against another and selling it at a higher price. Every country has a central bank that controls these interest rates. For instance, the UK has the Bank of England who announce the interest rate every month. In the recent years it has remained unchanged but if it rose, the demand for the pound will increase instantly and you are very likely to see the pound rise quickly against other currencies such as the US dollar.
Country’s economic state
This seems to be a sore subject for many developed countries these days but the basics are that if the economy is getting stronger the more likely the central bank will raise interest rates. Why? The first reason is that it will attract foreign investment into that country. The higher the interest rate the more foreign investors will be willing to invest into the financial markets. This will increase demand for the currency and so the price for the currency will increase; as you may see on your Forex brokers’ charts. The other reason is to eliminate inflation. If the economy is getting strong, the rise of interest rates will slow down the threat of a massive price rise.
Investors do not like the threat of political fall-down. If a political turmoil is announced across the news wires investors see this as something that will not help their investment so they simply pull out for a while. Until political issues are resolved they may not come back into the market.
Whilst there are other factors that influence the currency markets, you can see that it can be quite difficult to undertake daily Forex trading if you are not in tune with financial information such as above. If you are a technical Forex trader it might be best if you sit out every time announcements on the above events take place.