FOREX refers to the foreign exchange market, a segment concerned with trading with currencies and currency pairs. Like any other financial instrument, Forex is also driven by demand and supply. Fluctuation in the price of currencies occurs due to several things that may or may not happen around the globe.
The rate of imports by a particular currency is directly proportional to the demand for the respective currency. For example, the demand for Toyota automobiles, Nintendo video game consoles, and Sony electronics directly affect the demand for Japanese yen.
When exports happen in high volume to different countries, respective nations use the importer’s currency, contributing to the demand for the currency used. The currency’s value increase due to high demand is called appreciation. The converse situation occurs when a nation’s export deteriorates and reduces the demand for the currency of the respective nation, leading to depreciation.
Traders and investors consider several things while trading with forex. A nation with comparatively low inflation, more stable interest rates, and political stability is favorable to the investor, and the demand for its currency ultimately rises. Comparing these odds allows investors to speculate on the aspects of a particular currency reasonably, and traders may proceed with sensible trading decisions by going through the required odds.
Several things affect the volatility that prevails in the Forex market. These are some of the primary factors that affect the Forex market the most:-
Inflation Rate:
Lower inflation rate in a country contributes significantly to currency rates relative to the currency of a country with a higher inflation rate. It leads to an appreciation in the currency rates and attracts traders and investors. The same enhances the demand factor of a particular currency. While the converse situation leads to currency depreciation and acts as a repellent for traders and investors. The country’s inflation rate is a factor required to make rational speculation about a currency.
Economic Policies of the Government:
Economic policies play a vital role in providing ease of doing business with the respective nation. The ease of doing business contributes to the increased import and export rate. Increased import and export rates contribute to the exchange of currencies in high volume. It exponentiates the demand factor associated with the concerned currency and appreciates the same. Traders and investors ultimately get attracted to such currencies. Traders must go through economic or existing policy changes to reasonably speculate.
The Capital Market:
This factor provides a trader with a conjectural view of the economic status of a particular country. Trends in the capital market are directly proportional to the trends that may or may not happen in the respective currency. Traders need to sensibly consider this factor before making a bullish or bearish move in the market. It allows traders to narrow down the possibilities and reasonably anticipate the market outcomes before proceeding to trade.
Geo-Political Events Around the Globe:
These events positively or negatively motivate traders regarding trade with a currency. It casts a good or bad impression on the currency or currency pair. Before trading in a currency or currency pair, going through major geo-political events associated with nations is only logical.
Trade Weighted Index:
TWI is a multilateral exchange rate index, complementing the weighted average exchange rate. It compares the home and foreign currencies, and a respective nation’s weight equals the trade share.
An economy is termed stable if the exports exceed the imports. The higher the exports, the higher the currency’s value; on the contrary, high imports depreciate the currency’s value. A situation where imports are higher than exports is termed a trade deficit, and TWI is a standard to gauge the same.
Political Stability of the Country
Internal conflicts in the country are unfavorable to the economic aspects of the same. The political stability of a country attracts foreign investment and positively affects the crowd mentality, resulting in an increase in foreign capital and ultimately appreciating the value.
Recession:
When a country faces a recession, interest rates are reduced by regulatory bodies, which repels foreign capital, weakens the currency and lowers the associated exchange rate.
The Expectation of the Crowd:
Expectations or crowd behavior plays a vital role in currencies prevailing bullish or bearish trends. Behavior or speculation of the crowd may increase or decrease the demand for the associated currency and hence, can increase or decrease the value of the same.
Conclusion
Forex trading concerns the trade and exchange of currencies and requires a trader to go through the aspects of the segment before investing in it. Appreciation or depreciation of currency occurs due to the demand and supply index of the currency. Several factors affect the demand and supply of the currency and ultimately result in an uptrend and downtrend. Licensed trading brokers with a reputation in the market provide high standard services and tools to forex traders .It is important to choose a trusted forex broker for safe trading.
