EURUSD 1.1736 USDJPY 112.01 USDCAD 1.2787 EURCZK 25.547 USDCZK 21.763 EURPLN 4.2295 USDPLN 3.6036
EURUSD 1.1736 USDJPY 112.01 USDCAD 1.2787 EURCZK 25.547 USDCZK 21.763 EURPLN 4.2295 USDPLN 3.6036

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Learn the basics of financial markets

Forex is the world’s most liquid market, it reflects the balance of power between all the major currencies of the globe

Rule of thumb

Forex is also a specific market where the goal of a major part of the transactions is not just to exchange  one currency for another

 

The actual reasons for such deals are related  to other transactions on  an international scale, including import/export operations, mergers and capital market operations, that involve the necessity of a currency exchange as  part of the contractual agreement

Forex – an abbreviation for “Foreign exchange market”, is the place where  currencies are traded.

 

forex, market, analysis

 

Whether a certain currency is considered to be strong or weak in relation to another depends on many factors, including the economical and political situation in each country, as well as the overall situation on the global scene and other potential events of a random nature such as hurricanes, wars and international terrorism.

 

As there are many sources affecting foreign exchange rates, an active investor may follow many different types of information which can possibly influence the demand and supply of the exchange rates.

 

The compilation of such information is presented below:

 

 

Economic relations: besides the obvious effects related to the fundamental theories, that for example a rise in exports may result in the appreciation of a currency, there are other more subtle things to  bear in mind.

 

There are countries that may not have a big significance on the international market but are important, due to trade, to countries that in turn are significant. An example may be the South African Rand (ZAR), which is not so significant internationally, but is very significant to the Great Britain pound (GBP) because of the long-term trade relations between these countries.

 

 

Other markets situation: as currencies act as the only instrument that makes international trade possible, the situation of other markets will undoubtedly have an important effect on currencies. As investors become more interested in a specific market, the local currency will appreciate. The opposite will occur when investors retrieve their capital from a market.

 

 

Legal acts: legal acts, either local or international, may have rather medium to long-term effects on currencies. Legal acts, may behave as barriers, or the opposite, behave as an impulse for economic growth and/or development, which in turn makes a currency  depreciate or appreciate.

 

 

Weather conditions: weather directly affects the prices of commodities, but the impact on currencies may also be significant. Harsh weather may result in a small production of commodities like wheat or barley, which leads to a price increase of these commodities. Now, the weather effects on currencies might be uncertain. Usually, when bad weather  hits a country, investors tend to retrieve their capital from that country, which makes the currency depreciate.

 

On the other hand, investors might hurry into buying commodities before prices start to hike, which makes the currency to appreciate. This is why traders must follow very closely the factors that drive investors at a specific  time, by for  example seeing how commodity prices change and how fast they change.

 

 

Political situation: political situations or conditions have important impacts on currencies. When a country has a stable political situation (either internal or external - foreign policy) investors feel comfortable in investing in that country, so the home currency may appreciate. Depreciation typically occurs when the opposite situation takes place. An extreme case of a political situation affecting the currency prices is war, typically resulting in the depreciation of currencies of the countries involved.

 

On the other hand, economists may argue that in a case where the participation of a country in  a war does not affect its territory, increased government spending during such a period may cause a stimulus to the given economy and its currency.

 

 

Economic recession: economic recessions may have different sources. These may be financial (e.g. Banking crisis), related with commodities (e.g. Oil crisis), political or other. The common thing about recession is that in general people tend to withdraw their capital from the market in order to “save for worse moments”. The other thing that might happen is that capital will be concentrated into basic products like flower, sugar or other goods. This all depends on the nature and range of the recession.

 

The withdrawal of capital from one country, or a region, makes the currency depreciate. On the other hand, when considering the US Dollar in this respect, the result may be somewhat more complex. Investors withdrawing capital from other markets, and getting involved in “safe heaven” commodities like gold or other precious metals, may constitute a factor for appreciation of the US Dollar, as the commodities are typically priced in US Dollars.

 

 

Economic growth: in general a dynamic growth of a given economy attracts foreign investors, giving its currency a positive stimulus to appreciate. On the other hand, one must not forget that too quick growth of an economy may result in inflationary pressures. It has to be noted that a direct result of an inflation is a loss of the real value of the given currency, as the rising prices mean that less and less of the actual goods and products can be purchased in return for one currency unit.

 

 

Confidence: confidence indicators are relatively new instruments from the 90’s that help mainly foreign investors who want to get a broad picture on how residents of a country perceive the future shape of the economy. 

 

Currently, many monetary policy institutions also use these confidence indicators when making decisions on future policy. What relates this instrument to currencies is that a higher confidence may suggest that for instance companies are, or will, increase production, and individuals may increase their consumption levels, which results in an economic growth attracting therefore foreign capital and the appreciation of the local currency.

 

 

Events: there are different situations that may have varying effects on currency prices. Events with less significant implications could be the Olympic games. Currencies may appreciate not only during the actual games, but also before when there is an increase in infrastructural investments. Other more significant events could be strikes or general strikes. Strikes may discourage foreign investors, which may lead to the currency depreciation.

 

Strikes may not have a direct consequence  on a country’s economy, but may be related  to specific commodities such as gold or other commodities. In a case where a gold mine strike happens, the consequences may not affect directly the country where the strike is observable, but may, for instance, affect the US Dollar because that’s the currency used to trade gold. Traders should observe  caution with their investments when such events take  place, even on a local scale.

 

 

Experts opinions: experts or diplomats opinions may have very important consequences to the prices of currencies. How significant is the impact of such events on the currency prices depends on many factors, such as the type of  information passed to the public information, who passed that information and from which country. If considering comments from the president of a central bank, traders should take into account what country that is.

 

The comments from a small European country central bank president may not be compared with the comments of the European Central Bank or US FED president. A good example of how experts opinions make affected the markets would be Alan Greenspan’s testimony before the US Senate. This economist, at the time of his presidency of the FED, was considered to be an economic “guru”, which made every word of his testimony  have an enormous impact on currency pairs related with the USD.

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