Fundamentals of Forex Rates

Forex rates (currency prices) are a reflection of the supply and demand for currencies. The two main factors of forex rates are the strength of the economy and interest rates. Economic factors such as trade balance, GDP and foreign investment reflect the general state of a economy and are repsonsible for the changes in supply and demand for that currency. Economic data is released on a regular basis by countries which in turn affects the overall strength or weakness of their particular forex rates. The main data that should be looked at closely is - international trade and interest rates.

International Trade affects a countries trade balance and forex rates dependant on the net difference between a countries imports and exports. If the country imports more than it exports, their trade balance will show a deficit. If the deficit is more than the markets expect, then this data will trigger a negative price movement in the value of that countries forex rates. If the deficit is less than expected then there will generally be a strengthening or positive price movement in that countries forex rates.

Interest rates can directly affect forex rates. Generally, if a country raises its interest rates, that countries respective forex rates will strengthen in relation to other nations as global investors move funds to that country to gather a larger return on their investment. Lowering of interest rates will generally have the opposite effect on a countries forex rates.

Indicators that have the greatest impact on a countries interest rates and in turn, forex rates are the Producer Price Index (PPI), Consumer Price Index (CPI) and the Gross Domestic Product (GDP) data that is released by countries central banks.

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