A market trend is a general direction of the price of a particular currency pair. Currency price trends vary in length from short, to intermediate, and long.

Most forex profits are made by following market trends and it is very important for every forex trader to know the factors that influence market trends.

A good understanding of these factors will enable the trader be better equipped at predicting price movements and profiting from trades.

Factor 1: Capital Markets

The performance of a nation’s economy greatly determines the value of that nation’s currency. And, a key factor which influences the health of a country’s economy is the performance of its capital markets.

An increased buying of stocks and bonds in sectors of an economy shows increased confidence of investors in putting money in the country.

This in return attracts further investments from other countries and increases the demand for that country’s currency.

Capital market investments are very much highlighted in business and financial news globally. When watching the news, you will always hear of how stocks and bonds are performing.

Therefore, forex traders rely on the capital market gains and losses to make trade entry and exit decisions and these cumulative decisions develop into a forex market trend.

Simply put, a thriving capital market is a buy signal for that country’s currency while a falling capital market is a sell signal for the country’s currency.

Factor 2: International Trade

A country’s balance of trade refers to the difference between the country’s imports and its exports. It is basically a measure of international trade trends.

If a nation is exporting more of its goods and services to other countries than it imports from those other countries, it is said to have a positive balance of trade.

To purchase goods in any country, you have to use that country’s currency. Therefore, if you are a foreigner, you have to change your country’s currency to that of your trade partners.

This in effect means any country with a positive balance of trade has a strong currency and an increase in the balance of trade gap results in an appreciation of that country’s currency worth and demand.

This leads to a price trend where the currency grows in value. The opposite is true for a country which has a negative balance of trade.

Factor 3: Political Condition

The actions of the political class of any country determine how people view that country’s economic stability.

And such views affect that country’s currency value. When there are any upcoming political events which are likely to cause uncertainty, like election campaigns, the value of that country’s currency is likely to take a dip.

On the other hand, if a political candidate thought of as capable of improving the economy wins an elective post, the country’s currency is likely to appreciate.

Forex traders keenly watch the activities of political players and unfolding political events for anything that might affect that country’s currency prices. A stable political arena will result in stable currency prices.

A political arena that seems to be improving will be accompanied by a simultaneous currency worth appreciation while a deteriorating political climate will result in falling currency prices.

Factor 4: Monetary Policies

The declaration and implementation of fiscal and monetary policies of a country’s government are very critical factors in the performance of that country’s economy and its currency’s worth.

The decisions of the country’s central bank are likely to directly impact on interest rates and this directly influences forex traders on whether to buy or sell that country’s currency.

Factor 5: Economic Reports

Most shrewd forex traders maintain an economic calendar which enables the trader to receive all current information on economic trends in his/her countries of interest.

A country’s GDP is a great indicator of its economic performance and a big determinant of the currency’s value. A growing GDP acts as a buy signal for that country’s currency and a deteriorating GDP is a sell signal.

Another very important economic report is inflation reports. Growing inflation is a strong indicator of the falling value of a country’s currency.

However, rising inflation may also drive the central bank to increase rates and thus result in an appreciating currency which will increase demand for the currency.

Therefore, any inflation reports will influence forex traders buy and sell decisions.

Click here to read on how other economic reports affect market trends.

Factor 6: Supply and Demand

Like any other market, the fx exchange prices are greatly influenced by the market forces of supply and demand.

When there is too much of one currency in supply with very little demand, the prices of that currency will fall. The opposite is also true as a rise in demand coinciding with a fall in supply will increase the currency’s worth.

Factor 7: Speculation

Forex trading is a speculator’s trade and the perception of a currency’s price direction will influence currency traders’ trade decisions.

If consumers and investors think the country’s economy will deteriorate or its currency will lose value in the future, forex traders will start selling off that country’s currency today.

And this will result in a trend which will further influence even more forex traders to sell. A strengthening economy will have speculators trading in the opposite direction.

Factor 8: Market Sentiment

The way people feel about a currency may be difficult to quantify or even prove its existence.

Nevertheless, how people feel cannot be ignored. Market sentiment is a strong factor that influences currency price movements and price trends. Click here to read more on market sentiment.

Summary

There are many factors that influence currency price movements and price trends. Most of them are direct results of government actions and the effects of these factors may be short term, intermediate, or long term.

While the descriptions of how these factors affect the price of currency are detailed in this article, it should be remembered that these effects are largely dependent on how one currency compares with another.

It all comes down to how two currencies forming a currency pair compare against one another.

Photo credit: Miss M Schneiderhead