How Forex Rates are Determined

There is no doubt that all investors in forex market would love to know what causes Forex rates to fluctuate when making investment decisions. There are many factors that cause the price movement as the supply and demand of currency is not influenced by a single player. The changes of Forex rates are largely affected by several factors including political and economic factors. For instance, it is possible for the market to be affected by the way the national economy of a country performs. When the GDP of the country grows this may send signals to foreign investor to invest in such a country. When this happens it will affect the currency rates as the demand of local currency will be high causing the fluctuation of the price and vice versa.

Inflation is another economical factor that influences the movement of prices of currency. When a country experiences inflation then its currency will be directly affected by this, making the change of prices in the Forex market. Balance of trade is another factor that affects the way the currency trades in the market since the budget deficit or surplus has its consequences in the economy. When there is a balance of trade deficit then this means the country is importing more than it exports, and this makes the currency of such a country to depreciate causing an effect on the Forex rates. Another factor that affects exchange rates is the political factor that takes place in a country as well as the international politics.

The prices are sensitive to instability of politics and other speculation about the change of political system in country or the world. When investors have fears on the political situation in a country, there will be a negative effect on the exchange rates causing the fluctuation of prices. The political instability can also cause the price movement of currency due to several factors that a country cannot be able to control. When oil producing countries have political instability, other nations will experience the negative effect as this will affect the price of the oil in the world causing the currency demand and supply to change. There are times when the market Forex Rates are influenced by human behavior and psychology causing fluctuation of prices in the market.

When there is perception that the economic condition is going to change either negatively or positively, this will no doubt affect the exchange rates either negatively or positively in the short-term until the market adjusts itself. The government has to play a major role in controlling the behavior of investors. It has to ensure that the investor remains optimistic on the political and economic condition so that the fluctuation of currency does not occur. This is very important as any fear by the investors will affect the prices of currency in the market as well as the hope and faith for better condition will also affect the prices. There are many factors that can influence the change of prices of exchange rates, but the major ones are outlined above.

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