The Determining Factors of the Forex Market

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You do not have to be an expert in the forex markets to know that currency rates are in a constant state of flux, with values seemingly changing at the drop of a hat. One minute a national currency is performing strongly and on the rise, the next it is starting to struggle and lose ground against other currencies. Just what are the main factors which come into play when it comes to the forex markets? Here are some of the more common reasons for value changes.

Politics

Perhaps not surprisingly, the field of politics is probably the biggest determining factor when it comes to forex rates. Government budgets, trading policies and political stability all have a huge influence over foreign exchange rates. For instance, a country which exports more than it imports will have a strong national currency rate, while countries which have trading deficits will find their currency weak compared to its competitors.

National elections often have an impact on the markets, particularly if the final outcome of that election in in doubt. A close election, where the result is in doubt right until the closing stages, is seen as possible political instability by the exchange markets, causing the currency to fall in value. Conversely, if it looks like the current Government is going to stay in power, the status quo will have a stabilising effect on the currency rate.

Inflation Rates

The rate of inflation in a particular country will have a large bearing on the perceived strength or weakness of the national currency. High inflation rates will usually see a decrease in the value of the currency.

World Events

Along with politics in general, world events are a huge determining factor for forex rates. After all, the foreign exchange market covers the entire globe, so an impending crisis can have an immediate impact on rates. A good current example is the escalating crisis in Syria. With a possible interruption to oil supplies from the Middle East, much uncertainty will grip the foreign exchange markets.

Apart from the obvious devastating effect war can have on human lives, the uncertain future of a nation gripped by war means its currency value will normally plummet and have a knock-on effect on foreign exchange markets around the globe.

When all is said and done, traders on the forex market are in the predictions game. Their job is to try and forecast future events which, of course, is not an easy thing to do.

 

 

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