What Affects Currency Rates? - dummies

What Affects Currency Rates?

The forex market sets the value of one currency relative to another, so data’s being digested about at least two major international economies at the same time. Add in half a dozen or more other national economies, and you’ve got a serious amount of information flowing through the market.

Currency-specific fundamentals and technical analyses are key information inputs to establshiment of current rates.

Fundamentals that inform currency rates

Fundamentals are the broad grouping of news and information that reflect the macroeconomic and political fortunes of the countries whose currencies are traded. Most of the time, when you hear someone talking about the fundamentals of a currency, the reference is to the economic fundamentals, which are based on economic data reports, interest rate levels, monetary policy, international trade flows, and international investment flows.

There are also political and geopolitical fundamentals. An essential element of any currency’s value is the faith or confidence that the market places in the value of the currency. If political events, such as an election or scandal, are seen to be undermining the confidence in a nation’s leadership, the value of its currency may be negatively affected.

Gathering and interpreting all this information is just part of a currency trader’s daily routine.

Technicals that analyze market trends

The term technicals refers to technical analysis, a form of market analysis most commonly involving chart analysis, trend-line analysis, and mathematical studies of price behavior, such as momentum or moving averages.

Technical analysis is especially important in the forex market because of the amount of fundamental information hitting the market at any given time. Currency traders regularly apply various forms of technical analysis to define and refine their trading strategies, with many people trading based on technical indicators alone.