Foreign exchange market is always fluctuating, why? Because the foreign exchange market works based on the currency exchange rates. The currency exchange rate is determined by considering the present value of your currency and the foreign currency.
Like exchange rate = your home currency/ corresponding foreign currency.
There are few factors that affects home currency value. If the home currency value is changed then there will be effect on the currency exchange rate and this will lead to some effect on the foreign exchange market.
Basically there are some factors that affects the value of home currency.
The country’s economy is the main factor that affects the currency value. If the country has economic growth, high level of employment, development in the retail business and higher gross domestic product, then that country currency has strong value. That country’s currency maintains some consistency. Weaker the economic growth weaker the currency value.
A government budget has a huge affect on the currency value. If the country revenue is more than it’s expenses, then the government has surplus amount of money and the currency rate increases. If the budget is in deficit, then the currency value falls.
An increase in inflation rate leads to reduce in the value of nations currency. Inflation reduces the purchasing power and reduces the demand for the currency. If a country tries to controls it’s inflation rate by increasing the short term interest rates, the currency may strengthen.
The trade level affects the currency value. The demand for goods is shown from the trade flow between the two countries. The demand for the goods reflects the demand for the currency between the two countries.
Currency exchange rates are the key factors in forex trading, hence knowing about the factors which effect them, will help in better trading.