An Introduction to Currency Trading - II

Factors Affecting Currency Markets

The primary factors influencing exchange rates are political, economic and market psychology.

Political Factors

Political crisis and instability will have a major impact on a nation's currency. Elections, social upheavel, new political order and wars will cause market players to move their investments out of the country which affects the exchange rates. Businesses will tend to look at the political climate to invest which in turn will affect foreign exchange movements.

Economic Factors

Economic policies of governments, Central Banks policies regarding money supply and economic conditions will surely have a profound impact on the currency movements.

Balance of Payments in one the most critical factors affecting currency movements. (A systematic record of a nation's total payments to foreign countries, including the price of imports, the outflow of capital and gold, and the total receipts from abroad, including the price of exports and the inflow of capital and gold). A currency reacts positively to narrowing deficits and negatively to widening deficits.

Another factor is Inflation. Inflation erodes purchasing power and bring downs the currency value.

Reports like Gross Domestic Product, Employment Levels, Retail Sales typically influence exchange rates.

Market Movers

Hedge funds operated by market movers influence price levels to a certain degree. When the market approaches major support and resistance levels market behavior becomes more technical and this results in dramatic price swings.

Although exchange rates are affected by many factors, in the end it is just the supply and demand forces which is in play. The world's currency markets is a huge melting pot of various market factors and players, which in turn makes exchange prices to move dramatically.