The Setting of Forex Exchange Rates


Forex is one of the most powerful foreign exchange markets and it mostly consists of banks, but of other companies that are non-bank as well and its participants come from over the world. The turnover and the trading of Forex are very large and they are actually what determines the currencies exchange rate. Naturally, the exchange rate fluctuations are influenced by many factors and there and these factors can be grouped into political conditions, psychology of the market and economic factors.

So, let us first cast a look at the economic factors and see how they can influence the fluctuation of exchange rates. What actually makes these economic factors are economic conditions and economic policy. Fiscal policy and monetary policy together make the economic policy. Fiscal policy entails the practice of spending and budgeting and supply of money is influenced by the monetary policy. Of course, the surplus and the deficit of a government also have their impact on the market and it is reflected in a country’s currency value. The trade level balance can, of course, also be in surplus or in deficit and if it is in surplus, it affects a nation’s currency in a positive way. Also, if the productivity of economy is in increase it also has a positive impact and when it is in the trade sector it is more prominent.

As for the political conditions, internal, regional and international conditions all have an impact on the exchange rate in some way. Naturally, political turmoil and unsteadiness have an effective that is negative for a nation’s economy. For example, if a political coalition is destabilized this will have a very negative impact on the economy of that country, but if a rise of a financially responsible political group occurs it can have a rather positive impact on the country’s economy. Another possible scenario is that a neighboring country also affects the country’s situation in either positive or negative way.

When market psychology is concerned, several significant categories exist within it. Actually, there are the long-term trends and the business cycle analysis takes into consideration the long-term prices trends that usually develop from economic and political trends. There is also the saying “buy the rumor, sell the fact which very often describes a currency price tendency to reveal the potential impact of a certain action that is yet to occur and the sudden turnover of that impact to a completely opposite direction once the action has finished its course.

All in all, the previously mentioned factors are those that are basic and that affect the Forex market most often. The areas they come from are different and the factors are all grouped according to these categories. When all of them are combined, they resemble a large puzzle where each tiny piece matters a lot and affects the market in its own way. Certainly, there are many more other factors that affect the Forex market and these are only the basic ones.