What are the Key Factors that Affect the Forex Rates?

When analysing the currencies on a significant purpose, many traders experience being overwhelmed by a multitude of factors that impact the currency exchange rates. Consequently, this leads to overanalysing which creates trade losses and missed opportunities in the market. This article highlights some of the factors that impact the forex rates in the market. Read more here.

  1. Economic factors

They are classified on the basis of business cycles. It is a periodic fluctuation in the economy of a country because of the regular expansions and contractions in the economic activities. On the basis of this very reasons, economic factors are further grouped into three major kinds:

  1. Leading economic indicators: they foresee the future changes in economic activity
  2. Coincident economic indicators: they mirror the current economic state as they change in line with the state of the economy
  3. Lagging economic indicators: they lag behind changes in economic activity and are used to confirm coincident and leading indicators
  4. Inflation rate

Inflation is one of the most vital economic factors for the forex traders. When the time inflation data is released, currency pairs are prone to get very volatile at this very moment. Inflation simply refers to a measurement of the change in prices in goods and services over a period of time. Many central banks generally have an inflation target rate that they need to keep guard on. If the inflation is way too high or low, central bank needs to stabilize the economy. A small inflation is viable, but when it goes hyper, and deflation, it is a mere nightmare.

  1. Interest rates

Another important consideration is the interest rates when it comes to the factors that impact the forex market. As a matter of fact, economists have been trying to develop a long term currency valuation model on the basis of interest rates differentials among the countries and have observed the distinction in interest rates is tantamount to the anticipated change in the spot exchange rate which is also termed as the International Fisher effect.

  1. Current account and Balance of Payment

The balance of payments looks after all the international transactions of a country over a time period considering both the public and the private sector. The balance of payments has three main categories classified under it: the current account, the capital account, and the financial account.

The current account measures the inflows and outflows of goods and services of a particular country. It is a current account deficit when a country imports more than it exports, whereas the surplus is when the exports and more than the imports.

Current accounts help in determining whether a currency will rise or fall. In the case of deficit, the country needs to sell away its domestic currency to pay for the goods and services which in turn increases the currency supply of the country and puts downward pressure on it. Whereas, in the surplus, there is an increase in the demand for the currency which puts upward pressure on it.