The Foreign Exchange Market is far more complicated as compared to stock or bond markets. Predicting the foreign exchange rate includes predicting the performance of entire economies. There are plenty of factors which come into play when exchange rates are being determined. This article lists down and explains some of the important factors which have a major influence on the exchange rates.
Foreign Exchange markets are also financial markets. The price reflected in any financial market does not reflect the price of today. Rather, it reflects the expectations about the future based on the information that we have on hand today. Therefore, the foremost and important determinant of Forex rates between any two countries is expectations about the future.
The term “expectations about the future” sounds like a vague and generic term. The next question arises, “expectations about what?” The remainder of this article will explain the various factors that influence the exchange rates.
Exchange rates are basically a comparison between the policies of two countries. It is essential to understand that exchange rates are not absolute rather they are relative. The following factors are considered amidst many others while comparing the monetary policies of any two countries.
Therefore, Central Banks become extremely important participants in the Forex market since they control the monetary policy which is one of the biggest determinants of the value of the currency.
While monetary policy is controlled by the Central Bank of the country, the fiscal policy is controlled by the government. This too has important implications because it signals the forthcoming changes in the monetary policy.
However, it needs to be understood that once again there is a relative comparison between the public debts of the two countries in question. Absolute amounts may not matter as much!
The Forex market is extremely speculative in nature. This is because Forex provides the leverage for investors to amplify their trade several times using borrowed money and then invest in the markets. Therefore, sentiments take over the Forex market more than they take over other asset markets because of the availability of easy money.
Hence, just like all other markets, Forex markets are prone to irrational exuberance and they too can distort exchange rates in the short term creating long term investment opportunities.
At volofinance, our master traders are trained in our 3 technical, 2 analysis, 1 volume trading strategy we’ve developed. This strategy allows us to calculate and measure market sentiments to help reduce speculation when conducting our trades. We believe that by making controlled and calculated trading decisions we will be able to reduce the risk and help make consistency in our positive trades.