Foreign Exchange Trading

Guide: General Information

Determine Foreign Exchange rates

The Forex market can be very volatile, with rapid swings in the value of different currencies.

Any number of factors can influence Forex movements including:

Balance of Payments

Payments for international goods and services can determine the demand and supply of currencies.

State of the Economy

Money can flow out of an economy that is perceived to be weak into one that is perceived to be strong. This perception is based on anything from political stability, current economic growth rates, the country's debt burn, the rate of inflation, taxation, the level of exports and so on.

Interest rates

Investors and institutions look for the best return for their money. So, when the interest rate paid on a currency rises, the currency becomes more attractive.

All other things being equal when interest rates rise, some investors will decide to move their investments into that country and will need to buy its currency to do so.

Conversely, currencies sold to purchase the desired currency can lose value.

This is the traditional explanation of the link between interest rates and currency movements. But the issue is more complex. For example if an economy is already deeply in debt, raising interest rates may seriously impact the government's ability to pay interest on its loans.

Central Banks

Governments often participate in the Forex market by buying very large sums of one currency for another. This intervention could be used to prop up or deflate a currency for political or economic reasons.

Central Banks can also manipulate interest rates to influence Forex rates.

Unexpected news

The biggest swings in currency values are normally created by the announcement of economic or political news that was unexpected by the market as a whole.

Psychological factors

Any market can be driven by sentiment and psychological factors. The Forex market is a very liquid market, and therefore is susceptible to these factors.

Technical factors

Activities by professional currency managers, generally on behalf of a pool of funds, have also become a factor moving the market.

Technical analysis carried out by these professionals often points to major 'support' or 'resistance' levels for each currency. If these levels are breached managers could react at the same time leading to sudden and dramatic price swings as substantial amounts of capital are invested in similar positions.

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