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Factors Affecting Currency Trading

Similar to any other financial price, the price of an exchange rate is determined by the forces of demand and supply. The price of an exchange rate reflects many economic and non-economic factors. The most important factors are inflation, interest rates, growth, and macroeconomic risk.

 

Here are all the major factors affecting the fluctuations of global currencies.

1. Interest Rates

The interest rates of an economy are determined exclusively by the domestic Central Bank such as FED in the US and ECB in the Eurozone. When the interest rate of a Forex currency is increasing, that means that more investment funds are attracted and buy that currency in order to achieve a higher interest return. On the other hand, when interest rates are decreasing a Forex currency is less attractive to investment funds and thus it is expected to fall against other currencies. 

Interest Rates Correlation

1) When Interest Rates increase ↑ → the domestic Forex Currency increases too ↑

2) When Interest Rates decreases ↓ → the domestic Forex Currency decreases too ↓