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Factors that Cause Fluctuations in the Currency Market

The currency (Forex) market is subject to frequent fluctuations. The first question that comes to mind is “What causes these fluctuations?” The primary cause of these fluctuations is, of course, a shift in demand and supply. But, what causes this shift?

The Currency Market: Factors that Cause Fluctuations

The demand and supply pattern in the currency market is primarily governed by the following broad category of factors:

Economic Data Economic data of a country, such as gross domestic product (GDP), industrial production (IP), consumer price index (CPI), unemployment numbers, Manufacturing Index of the Institute for Supply Management (ISM), retail sales, international trade and housing statistics, directly impacts the value of the currency. This data is regularly released by a government or a private organization that keeps track of these economic performances. This economic data reflects a country's economic health. If a country’s economy is on the downswing, the value of its currency is most likely to fall vis-à-vis the currencies of other nations.

Interest Rates Any change in the interest rates of a country directly impacts the value of its currency. If a country raises its interest rates, the demand for and, consequently, the value of its currency will rise in relation to other currencies. When a country lowers its interest rates, people will start earning lower interest on their deposits and investments, reducing the incentive of holding this currency. They will then tend to buy other currencies of countries that offer higher interest rates. This will reduce the demand for the particular currency.

News A change in the nation’s political conditions and other such news could lead to severe fluctuations in the value of the currency. If a country’s government modifies its trade policies such that they adversely impact traders and businessmen, the demand for the currency would decline immediately. A national calamity, such as earthquakes, hurricanes and floods, can have a negative impact on the value of a currency.

Market Sentiments The way people perceive a national or international event has a direct bearing on the currency market. Even if an event occurring in a country is not of a high risk category and might not impact the country’s currency, traders may go ahead and sell the currency for a safer investment.

Keeping a check on all these factors can help investors benefit from a profit-making opportunity or save them from making losses. easy-forex® offers trade tools that can help investors keep track of the factors that have a direct bearing on the currency market.