Factors influencing exchange rates Forex currency

Exchange rates between currencies

The Forex exchange rate in the market is the number of units of the secondary currency are needed to buy one unit of the base currency. For example, in the EUR / USD, the euro exchange rate against the US dollar indicates how many US dollars needed to buy one euro.

The determination of the exchange rate between currencies, as happens with other financial assets, is based on the relationship between supply and demand. Supply and demand for foreign exchange is closely linked to imports and exports of each currency and therefore has a key role in international trade and the economic situation of each country. Governments and central banks may intervene through measures affecting these exchange rates by monetary policy.

A currency with a higher interest rate change will make the country's exports are more expensive while imports will be cheaper. In contrast, a low exchange rate will facilitate the country's exports while imports become more expensive.

Factors influencing exchange rates

Every day we see how the buying and selling different currency pairs Forex market fluctuate constantly and that is where opportunities arise for trading profits. But what factors should these fluctuations in the exchange rates of currency pairs?

There are numerous economic, political and market sociology that can affect these exchange factors. The main ones are the following:

- Inflation

Inflation is widespread and sustained rise over time in the prices of goods and services in a country. Rising prices of goods and services within the country means that exports and reduce imports become cheaper from foreign countries. The effect of inflation on the exchange rate will gradually decrease the value of the currency of the country.

- The trade balance

The trade balance shows a surplus if the country's income earned in foreign trade outweigh the costs. If the expenses are greater than revenue deficit will occur in the trade balance. The surplus will cause the domestic currency to rise in value while the deficit will cause a decrease in the exchange rates of the country's currency against other foreign currencies.

- The interbank interest rates
Central banks are responsible for setting interest rates and therefore can directly influence both on inflation and on the exchange rates of a currency. Some high interest rates facilitate the entry of foreign capital causing an increase in value of the currency while some low interest rates will cause a decline in the exchange rates of the currency.

- The real income of citizens
When citizens of a country have greater purchasing power they will tend to grow more imports than exports and thus lead to increased demand for foreign currency will lower the exchange rates of the local currency.

- Political stability

Countries with greater political stability also have greater capacity to attract foreign capital by increasing the value of the local currency. If the country has increased political instability foreign investors tend to seek other destinations more stable shelter and therefore the local currency will depreciate.

- Psychological or speculative grounds

Feelings in the Forex market also have a great influence on exchange rates. Often certain currents of opinion on a particular currency that attract speculation and can make for example there is a significant demand and therefore the exchange rate increases are generated. Similarly, any buzz about the economic policy of a country or situation or intervention on interest rates of a given central bank can make the exchange rates of currencies fluctuate.

They believe that would be the main factors affecting currency forex exchange rates in the market, auque there are more and some specific to each currency.

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