February 13, 2014

Factors that Affect Foreign Exchange Rates Trends

This article looks at the factors that affect foreign exchange rates trends.

Factors Affecting Foreign Exchange Rates

When you trade on the forex market you will notice that there are a lot of different factors that affect the market.  If you are looking to trade on the trends then you should consider the factors that affect the foreign exchange rates trends.  These factors will change the way that you are able to trade and the analysis that you complete.  There are 4 primary factors that you should consider when you look at the trends in the foreign exchange rates.

The Impact of the Government

The first factor that you should consider is the government and the impact that they have on the foreign exchange rates.  The way that the government affects the foreign exchange rates is through the monetary policy releases that they have.  If the government is looking to change a piece of fundamental legislation then the market is going to react to this.  The reaction of the market may be a positive or a negative one.  Either of these reactions will cause a trend in the market.

When you look at the impact of the government you should also consider what the central bank is doing.  The changes made by the central bank will affect the trends in the market and you have to know about this.

The International Foreign Exchange Rates Transactions

There are a number of international transactions that are completed between countries and major players on the market.  These transactions will affect the trends in the market because they change the supply and demand of the currency.  When you look at the international transactions completed by the different countries you will be looking at the balance of payments.

This is a fundamental forex news item that will affect the way that traders view a currency.  When the balance of payments is in favour of the currency then there will be a positive reaction on the market and this will often cause a trend.  However, there are times when there is no trend on the market because the news traders are getting is what they were expecting.

The Effect of Participation

Many traders do not consider the effect of market participation on trends.  When there is a trend movement on the market traders will follow this.  The trading on the trend will actually drive the trend to continue.  This is the market momentum that you have to look for when you trend trade.  Once there are too few traders to drive the trend there will be a slowing of momentum and this will lead to traders closing their trade positions.  This will also help lead to the end of the trend in the market.

The Supply and Demand of the Currency

One of the major factors behind trends is the supply and demand of the currency.  When there is a high demand for a currency you will see a trend in the market.  The high demand for the currency can be caused by a number of factors.  However, when there is a low demand for the currency you may also see a trend in the market that moves in the opposite direction.



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