What causes exchange rates to move?
Many novice traders, having never mastered the basic principles of trading in the foreign exchange market, are already asking the question: “Why do exchange rates move on Forex?” This question is really very important and understanding it will allow the player to quickly master the principles of trading and earn decent amounts on the market.
However, in order to give a full answer to the question, you will have to understand the criteria that determine the value of a currency:
-movement of capital;
-level of import and export.
In turn, exchange rates are set in motion by the activities of the following participants in financial relations:
-commercial funds;
-central banks of leading countries;
-exporters and importers;
-influential politicians;
An important informational event can also set the market in motion, but even if it has not yet come out, and the financial community is very much expecting it, this can already put pressure on currency quotes.
Export Import
Every trader must understand the mechanism of import and export in order to focus on these indicators in their trading activities. Thus, if production costs increase in a country relative to other countries and prices rise along with them, imports begin to gradually take precedence over exports. As a result, the demand for foreign exchange increases due to increased demand for foreign goods. Back in the last century, this phenomenon was given the name “purchasing power parity” based on exchange rates. This concept states that a change in the ratio of exchange rates between two countries, other things being equal, leads to a proportional adjustment in the relationship between the value of a product within the state and abroad.
Movement of capital
At a time when an investor intends to purchase the maximum number of foreign financial instruments, he thereby contributes to the growth of the value of the currency of the same state. That is why even small fluctuations in exchange rates can significantly increase their amplitude due to the movement of “easy money”, which appears simply because of expectations or rumors about potential difficulties and problems. On a large scale, capital movements lead to sharp fluctuations in the price of currencies, and in some cases even develop into a financial crisis, which immediately affects the international Forex market.
Activities of Central Banks
Specialists from admiral markets poland note that foreign exchange markets within a state are very dependent on the activities of their Central Bank. Surely many have heard about the “floating exchange rate”, which is obtained only when the Central Bank of the state does not engage in foreign exchange transactions with foreign currency on the international market. However, in reality there are not so many such states. The situation is further aggravated by the fact that some states, through their central banks, are trying to put pressure on the national bank. Experts call this impact “dirty swimming.”
Statements by politicians
Oddly enough, just a few words from an influential politician can sometimes be enough to turn the international market on its head. Most summits, reports, important meetings and press conferences are already displayed in the forex economic calendar, so traders have the opportunity to prepare for such events in advance. However, although trading on news promises serious prospects, it still remains a rather risky undertaking in which you can seriously burn out without the proper experience and information support.
Interaction between exporters and importers
In the foreign exchange market, importers and exporters are the main contingent of participants who set the tone for all further movement; traders take this factor into account when conducting technical analysis. And in this case, the former are aimed at buying foreign currency, and the latter – at selling it. Taking this into account, many companies engaged in the field of import-export relations maintain entire analytical departments dedicated to forecasting prices on the market. Thus, they manage to buy and sell currency at the best possible prices.
Activities of the funds
It is the funds that have the greatest influence on the long-term movement of the foreign exchange market and it is they who are entrusted with the task of control. This is not surprising, given the share of these markets in the total share of funds invested in world currencies. Due to serious capital, funds can influence the movement of exchange rates in the desired direction for a long time. But in order to implement such plans in the global market, funds have to assemble a team of real professionals with phenomenal strategic thinking and a long-term vision of the currency market.
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