The key driver of forex movement is supply and demand. As external influences change the amount of a particular currency in circulation, or how much people want to hold it, its price will move. Here are three major factors that can impact supply and demand in forex.
If you purchase an asset in a currency that has a high interest rate, you can get higher returns. This can make investors flock to a country that has recently raised interest rates, in turn boosting its economy and driving up its currency.
However, higher interest rates can also make borrowing money harder. If money is more expensive to borrow, investing is harder and currencies can weaken.
The steady stream of announcements concerning a country’s economy – like GDP, inflation and production figures – can have a major impact on market confidence, and in turn cause forex movement.
Central bank actions can also have a major effect. Quantitative easing, for instance, involves increasing the amount of currency in an economy, which can cause its value to depreciate.
The overall feeling among investors about the direction of an asset can be a major influence in any financial market, and forex is no different. If the majority of traders believe a currency is on the way up or down, it can influence others to follow suit.