Trading on the forex market is a tempting method for many individuals and businesses to try and make a profit. As an over-the-counter market there is no central exchange point, which means you can start trading from home with just a computer, internet connection and FxPro forex trading platform.
Plenty of practice and research is required before putting your money on the line. There are a number of elements which can affect the exchange rates, so to enhance your chances of making more money it is important to be aware of the most common ones.
Countries with a low rate of inflation see an appreciation in their currency value. This is because buying goods in that country or region becomes a lot more competitive, so many will want to invest in that currency to do so, thus strengthening the currency. Likewise buying goods in other currencies becomes less competitive, leading to less investment and depreciation. Higher interest rates usually accompany higher rates of inflation to try and combat the rising values.
2. Government debt
Many countries with large public and national debt end up in a spiral of less investment leading to rising inflation and weakening currencies. When markets fear there is a chance the government may default on such debt, as happened in Iceland in 2008, they will soon start to pull out any investment. Iceland ended up stabilising eventually but did see the value of their currency drop significantly first.
3. Political stability
Investing capital in countries with a strong history of economic performance and a secure government with little risk of turmoil is often the safest option. These are far more attractive to investors, which results in further capital being pumped in and a strengthening of their currency. Japan is often seen as a safe bet and with Greece’s recent crisis it saw the Yen strengthen against the Euro. For countries where political unrest and/or economic volatility is common there is less incentive to invest and their exchange rate will depreciate.
Making money on the forex market is essentially all about speculation and investing in currencies before they increase in value. For this reason there can be changes in exchange rates not related to economic factors. If investors believe the Euro is going to strengthen, either due to recent news stories or advice, then a lot may invest in it hoping to profit which will then appreciate its value anyway.
5. Interest rates
“Interest rates, inflation and exchange rates are all highly correlated. By manipulating interest rates, central banks exert influence over both inflation and exchange rates, and changing interest rates impact inflation and currency values. Higher interest rates offer lenders in an economy a higher return relative to other countries. Therefore, higher interest rates attract foreign capital and cause the exchange rate to rise.” Investopedia
Related: Negative Interest Rates: What Are They and Why Are They Here?