What factors influence foreign exchange market
Foreign exchange is a currency other than the local currency which is used in settling international transactions and is also known as foreign currency. Forex online trading is a system of converting the currency of one country into the other’s currency. Therefore, it is the process of converting the national currency into another country’s currency and also transferring the ownership of money from one country to another country.
Various factors influence the forex market. So, this article covers all the crucial factors.
1. Economic factors- Economic factors involve all the economic policies spread by the government agencies and the central banks. Thus, the economic condition include-
(a) Government budget deficitssurpluses- The value of a country’s currency is affected in one way or the other. In the case of a widening government budget, the market used to react positively and vice-versa.
(b) Balance of Trade- The trade flow between the countries indicates the demands of goods and services and thus, reflects the nation’s currency. For example- Trade surplus has a positive impact on the nation’s currency and vice-versa.
(c) Inflation-There is no doubt that if any country’s inflation rate is low as in comparison with any other country then it will have currency appreciation as in comparison with a currency with a high inflation rate.
(d) Economic growth- Generally, the reports say, that the healthier and effective a country’s economy, the more demand it will be there.
2. Political factors- The factors include political conditions that have a direct influence over the currency markets. For example- Due to COVID-19, many countries are facing a problem that in turn reduces the nation’s economy. Similarly, any political instability can affect the nation’s economy worldwide. The change in political conditions has a direct impact on the currency of other countries.
3. Market influence- Market psychology is the other factor that influences the foreign exchange market.
(a) Balance of payment- Balance of payment is the financial transactions that took place between the country and the rest of the world. The work of BOP is to monitor the country’s international economic position and also influencing the micro and microeconomic operations.
(b) Speculation-Speculation influence exchange rates. Forex market does not consist of a physical place for trading on and that’s why considered as an unregulated stock market started through over the counter through telephone by the bank. Most of the countries prefer to do speculative trading and in turn, cause the currency movement and exchange rates.
(c) Interest rates- The increase or decrease of the interest rate of one country than in comparison with another country will have an impact on the country’s currency. The currency with a lower interest rate depicts the selling of currency in place of other currency to achieve high returns.
To conclude-
So, these factors should take into consideration when settling international transactions. The forex brokers who give access to the client to deal in buying and selling of foreign currencies must consider these factors when making payment.Therefore, the forex market runs mainly on the economic indicator and has a direct impact on the value country’s currency. It is a must to keep an eye on every factor in a competitive and fast-moving forex market world.
