Factors that Stimulate a Price Change in Forex Market

price change in forex by Fuad ahmed

The entire game of forex trading depends on forecasts and predictions. If one has to determine the success rate of a trader, one should try and check for the future analysis that he can make about the price movement of currency pairs in the forex market.

If a trader wants to make a profit out of forex trading, he should have a fair idea of how market prices change and move. To develop a thorough understanding of the exchange rate, a trader should contemplate and study in detail the factors that influence the price rates in the forex market. There are two kinds of forecasts that are being made in this trading.

Short term future prediction

Long-term future prediction.

Both of these approaches have a different set of rules and work on varying time frames. The analysis made for the short-term market movement differs in many ways from that of the long term. Fuad Ahmed, currency trading expert, in this article has brought together all the factors that possibly cause the change in prices of forex rates.

Short-Term Analysis of the rates.

Most of the basic models that are tested to predict the forex market have proven to obtain results that were rather long-term or were mixed in approach. Therefore, investors compiled a list of tools that are applicable to predict events happening in the short time frame. The tools that are being used for such predictions are technical analysis, sentiment surveys, order flow data.

The basic idea behind making use of these tools is to detect the market movement when it’s at an early stage and trade as per the same prediction. Its based on reading the trends and chart patterns currently going on in the market, to receive positive returns in the trade.

The tools that are used in the short-term prediction are sentiment surveys, futures market and order flows.

Long-term prediction.

The long-term analysis of the market is based on more persistent trends, it tends to focus on the more long-lasting state of the market. There is no set rule to determine the price of the currency, however, considering a few factors, the prediction in long-term of the forex market is very much possible. The few models that can make this analysis easy for the trader is PPP, interest rate approach, payment balance, and portfolio approach.

The other factors that play a vital role in changing the foreign exchange price are as follows.

Economic Growth.

The economic growth of a country is the best indicator of the value of its currency. The stronger a country’s economy is, chances are that the state’s Reserve Banks will raise the interest rate on the currency to capture the inflationary rate.  With the increase in interest rate, the flow of investors come in and participation in the market increases. The multiplying number of investors in a country’s financial market is a sign of economic growth and business prosperity. The flow of business leads to more demand for the currency and hence the increase in exchange rate.

Geo-Politics.

As currencies are representatives of countries than companies, any turbulence in the geographical territory or the political system can cause a great difference in the currency rates of a state. The actors of the exchange market should focus on the political situation to correctly identify the turning point in the currency rates.

Interest Rates.

As discussed earlier, the rise in interest rates is a sign of an increase in the currency value. As the currency’s value increases, it leads to the appreciation in capital arriving in the local market and hence more FDI and investors coming in. There are two ways that bring interest income in the country.

Through the purchase of currencies from countries with the high-interest rate.

 Through financing of the purchased items done with currency from a country that has a low-interest rate.

Acquisition and Merger.

Mergers and acquisitions are the last factors to direct the flow of currency rates. However, it often works as a vital force to drive the currency value and also where it’s moving. Mergers and acquisitions take place if a company is interested in buying an economic property in a region other than the home country. Investors that have an eye to see the future of events can predict a short-term analysis based on the company’s purchase of a corporation. The wisest investor will know how the market is going to turn after the merger takes place or if a company is acquired by another.

Trade and capital

The price of a currency’s exchange is directly dependent on the trade balance or deficit the country is undergoing at that time. The capital flow is usually in the direction of trade and investment countries receive from international sources. Trade flow is the income that comes from the amount of trade that perpetually comes in a country.