What affects the price of forex pairs?
There are a number of factors that affect the price movements of every forex pair. These include interest rates, geopolitical instability, the strength of their country’s economy and the level of foreign direct investment (FDI) in the domestic market.
Interest rates are controlled by the monetary policy of that currency’s respective central bank. For example, if the US Federal Reserve (Fed) raises interest rates, it’ll usually cause the US dollar to strengthen against the euro, making the price of EUR/USD to drop.
This is because investors tend to favour countries with higher interest rates when they’re deciding where to store their money. Essentially, an investor will receive a better return on their initial capital in an environment with higher interest rates.
Geopolitical instability could mean that investors and traders lose confidence in a country’s ability to govern, or expect that there’ll be difficult times ahead for the economy. This might lead to the currency stagnating or becoming too volatile to trade.
Trading a volatile market all depends on an individual trader’s appetite for risk, with some traders preferring markets with frequent movements as an opportunity to realise a quick profit. However, volatile markets are also higher risk and losses can happen just as quickly.
With forex majors, such movements are less frequent – although important political events can still affect the price of sterling and euro currency pairs.
FDI can affect the price of a currency pair because an increase in FDI is indicative of greater investor confidence in that country’s economy and infrastructure. This can increase demand for that country’s currency, which will cause the price to rise.
For example, if there was a significant increase in FDI in the American economy, it would be expected that the value of the US dollar would strengthen relative to other currencies that it is paired with.
The strength of a country’s economy and the level of FDI are often directly correlated.
