What Moves Currency Pricing?
The price of a currency is a reflection of the market's belief in that economy.
Specifically, currencies are a commodity. As such, the price of a currency is ultimately driven by supply and demand. The forces driving supply and demand can be broken down into 3 major categories.
Macroeconomic Factors
This includes high level factors such as monetary policy (a central bank controlling money supply), fiscal policy (a government's budget), and economic conditions.
Generally, economic conditions are measured by a core set of indicators. Some of the core indicators are:
- Government Budget - Is the government running a deficit or is their a surplus?
- Balance of Trade - Is the country a net importer or a net exporter?
- Inflation - Is inflation high or stable?
- Economic Growth - Check the GDP, employment, and other high level reports.
Market Psychology
Technical Analysis - Many traders are "chartists" that buy and sell based on perceived patterns in charts. Often large numbers of traders will follow similar charting methods and reach the same conclusion.
Flight to Quality - Unsettling events such as a large natural disaster or coup detat can send traders from one currency to a more stable currency en mass.
Political Factors
Political change can have a profound impact on currency prices. These include everything from the dramatic - war, terrorism, revolution - to the more mundane like new laws or change in political party.
There is a substantial risk of loss in forex trading.
You should only trade with risk capital that you can afford to lose without impacting your lifestyle or retirement plans.
The views expressed on this site represent the current good faith views of the authors at the time of publication. Please be advised that these views are subject to change at any time and without notice.
