What moves forex markets?
Like most financial markets, forex price movement is primarily driven by supply and demand.
Banks and other investors tend to want to put their capital into economies that have a strong outlook. So if a positive piece of news hits the markets about a certain region, it will encourage investment and increase demand for that region’s currency.
Unless there is a parallel increase in supply for the currency, the disparity between supply and demand will cause its price to increase. Similarly, a piece of negative news can cause investment to decrease, in turn lowering a currency’s price. For this reason, currencies tend to reflect the economic health of the region they represent.
There are many factors that can affect the demand levels of a currency over either a short-, medium- or longer-term timeframe.
||Risk appetite, volatility, moves in commodity prices, interest rate pricing and positioning
||Current account surplus/deficit, fiscal policy, political risk, bond yield spreads (or differentials) and relative economic growth
||Purchasing power parity, net foreign assets and terms of trade
Market sentiment can also play a major role in driving currency prices. If traders believe that a currency is headed in a certain direction, they will trade accordingly and may convince others to follow suit, increasing or decreasing demand accordingly.
But demand isn’t the only variable that can impact a currency’s price. Supply is controlled by central banks, who can announce measures that will have a significant effect on their currency’s price. Quantitative easing, for instance, involves injecting more money into an economy, and can as such cause its currency’s price to drop.