As part of every trader’s desire to try and understand the market and make Forex predictions, you must try to find the things that influence the prices of currency pairs.
Naturally, there are many financial, political, and other factors that all weigh in and help push the market in various directions. In this article I want to focus on three of these factors.
1. Interest rates – Much of the money that’s flowing through the Foreign Exchange market has little to do with actual trading as you as a trader will do. Banks, stock funds, bond funds, and global companies all buy and sell financial assets that are quoted in one currency with another. For instance, if I were in Britain and wanted to buy shares of Apple, I’d have to exchange my British Pounds for US Dollars.
One of the things that may cause me to invest more of my money in assets quoted in one currency over another are interest rates. These often provide a benchmark by which the return on my investments are calculated. For instance, if the Interest rates in the US are 1% and in Europe they are 3%, I will get a bigger return for European bonds than for US ones (this is a generalization but it is often this case).
This is why changes in national interest rates can lead to massive movements in the Forex markets and can change the value of currency pairs.
2. Oil prices – Oil is the most important commodity in today’s global economy. It’s price influences that of the USD and all the currency pairs in which it is involved. The reason is that oil prices are quoted in US dollars, so when the price of oil changes, so does the oil buying power of the USD changes.
For instance, if a barrel used to cost $60 and now it costs $54, you can buy 10% more oil with each dollar so its buying power and value should rise, which often happens. Other commodities also help influence the prices of currencies but oil seems to be the biggest thing.
3. Fear – Overall fear and financial uncertainty can make some currencies more popular than others. The USD is often viewed as a safe haven currency, a place where people flee to when all other investments seem scary or uncertain. It is often the case that when the stock market seems shaky that the US dollar rises in value. So, pay attention to the overall fear in the market. It may change Forex prices.
These 3 factors or influences are not deterministic. They will not work 100% of the time. However, they can prove to be a good tool by which to analyze the Forex market better.
