Some key factors have great impact on the Forex market; therefore these should be kept in mind before initiating a trade. Interest rates play an important role because people want to borrow at low interest rate lend at a higher one. The GBP/JPY provides a good opportunity to the traders because they borrow Yen at low interest rate and use it to buy and hold pound at a higher interest rate. In this way investors make money on the interest until the currency pair does not depreciate in value.
Economic growth is another factor affecting foreign exchange market. Usually traders want to invest where there are more chances of growing money. When you buy a currency, you actually invest in that country. If the economy of that country strengthens, the currency will appreciate because more people will like to invest in that country. Geo-politics also affects the currency exchange market because investors want to keep their money in a stable and safer country. A negative situation can be a danger for the economy of the country as well as to the value of a currency. Instability will reduce the investment in a country and ultimately the demand of its currency will decrease in comparison to the more stable currencies.
Trade and capital flow is another factor that affects Forex trading. Import and export affect currency price. If export is more than imports in a country, then the currency of that country is in demand which will have an upward effect on the price of the currency. Investors should keep an eye on the trade balance of the country and should keep the track of economic reports.
Merger and acquisition activity also affect the currency trading. When companies in other countries make large transactions, they have to accumulate large amount in the market which may impact the value of the currency involved. The rise and fall in the value of a currency in foreign exchange market is directly related to the supply and demand. Spending money by the consumers affects the supply of money. The foreign exchange rate reflects the supply and demand of the currency of that country. When the economy of a country falters, the spending by a consumer declines and hence the online trading sentiment becomes sour, leading to decline in the currency against other currencies having stronger economies. In short, you can say that a booming economy lifts the value of its currency.
Economic growth is affected by the employment level of a country because with the rise in the unemployment, money spending capacity of the people decreases because jobless workers have less money to spend on things which are not essential. The employed workers also start worrying for their future and try to save more money. An increase in unemployment indicates a slowdown in the economy and devaluation of the currency because of lower demand and declining confidence. If demand decreases continuously, the currency supply builds and exchange rate depreciation takes place. These are some of the major factors that affect the foreign exchange market.
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