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You don't know what to look for to understand the currency value changes? Below we have gathered a list of factors that are great signals in perceiving the currency value, why it increases or decreases in relation to other national currencies.
Differentials in Inflation – countries with a lower inflation rate show an increase in purchasing power, hence the currency value increases in relation to trading partners having higher inflation rates
Differentials in Interest Rates – higher interest rates offer the lenders in the economy a better return; in such cases, higher interest rates attract foreign capital and cause the exchange rate to rise
Current-Account Deficits – the balance of trade between a country and its trading partners will reflect a decrease in currency value when the country spends more on foreign trade than it is earning
Public Debt – countries with larger public debts usually engage in large-scale deficit financing to pay for government funding; this encourages inflation in such countries, hence value of currency decreases
Political Stability & Economic Performance – countries with political stability and economic performance tend to draw investment capital away from countries perceived with a higher political or economic risk; “riskier” countries will see a loss of confidence in local currency, hence its value will decrease
Speculation – if a country’s currency value is expected to rise, investors will demand more of that currency to make a profit in near future; this will result in an increase of the value of the currency
Employment Outlook – if unemployment increases, consumer spending falls and public debt rises; this will result in currency devaluation
Central Bank Actions – governments through their Central Banks tend to resort to some manipulation technics to intervene in the national market for stabilization; measures such as quantitative easing will increase the money supply in the economy, creating a risk of devaluation for the currency
Increase in Currency Demand - increase in currency demand can be a short or longer term result for multiple factors; a country with a high number of nationals working abroad can see an increase in currency demand around holiday periods when these nations will come home with a flux of foreign currency
These are just a few main factors to keep in mind, and by studying the markets you will identify and understand more trading factors. It is also advisable you understand the main mistakes in Forex trading so you can avoid falling into any of the common problems. Understanding the markets together with a good deal on trading CFDs like Forex registration bonuses can give any user a great starting advantage.
