Factors that Affect Currency Trading with Forex

by : Justin Stewart

There are numerous factors that have an affect on currency trading where the rates (prices) are taken into consideration. But the bottom line with currencies, as with any other commodity, goods, or services that can be purchased, sold, or traded is that the outcome is always arrived at based on supply and demand factors. If you look at the forex market as a "melting pot", so to speak, it is a huge, constantly changing financial environment affected by the shifting of these supply and demand factors.

Accordingly, it relates in the shifting of a currency's price versus that of another. Suffice it to say, there is no single market in the world that encompasses so much of what is happening on a global and economic scale as what is displayed with the forex market. There is no single element responsible for the influence of valuation when it comes to supply and demand. Instead there are three groups of influential factors categorized in the following manner:

1. Economic factors
2. Market psychology
3. Political conditions

The following content will provide you with definitions and descriptions that relate to each of the categories.

Economic Factors - economic policy mandated by government agencies and the central banks within those governments are probably the major influencing factors within this category. However, the dissemination of these policies, coupled with economic conditions that are revealed through various economic reports and economic indicators all have a significant affect.

Economic policy is normally comprised of government fiscal policy and monetary policy. The central bank is very powerful in this aspect as it directly influences the supply and "cost" of money, based on arbitrarily established interest rates. Economic conditions are classified as follows:

-Balance of trade levels and trends
-Economic growth and health
-Government budget deficits or surpluses
-Inflation levels and trends

Market Psychology - combined with trader perceptions, this becomes a major influential factor in a variety of ways such as the following:

-Buying the rumor and selling the fact - this is the tendency of a currency's price to reflect the results from an action before it occurs, and then when it does happen, it's the direct opposite of what was predicted.

-Economic number's - reflective of economic policy that takes on what appears to be a "talisman-like" effect of the direction that the market travels in.

-Flights to quality - unstable political climates which cause investors to seek out a safe haven.

-Long-term trends - standard movement of currency rates in the forex market. Although currencies do not have "seasons" as do commodities, however, cycles in business will have an effect on the currency rates.

-Technical trading considerations - the formation of patterns in direction of the rates based on the movement of these rates in the market. Price charts are often studied to try and discover such patterns.

Political Conditions - very profound effects occur within the market based on internal, regional, and international factors. Political changes or upheavals can directly influence the direction that a currency's price travels in.