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Beginner’s Guide

What’s affecting the price movement of a currency pair?


Factors affecting Forex Trading
Factors affecting Forex Trading, image: dailyfx.com

We discussed Aggregate demand not as long ago as one of the factors affecting forex trading; there are tons and tons of other factors affecting the price movement of a currency pair. The supply and demand changes constantly, making the market very volatile. There’s no market like the forex market. The constant shift of the market makes the currency to be very liquid.

In a nutshell, Forex Trading and/or the price movements of the currency pair is affected by Supply and Demand factors influenced by a number of elements of which all of them fall under Economy, politics and trader’s mindset (Market psychology)

Economic Factors

It is incredible to have learned that MT5 offers news in a form of an economic calendar. I would say Economy is the biggest factors that affect FX (forex) trading. There are policies disseminated by a number of huge central banks, government, and economic conditions, these policies are usually revealed through reports.

The economic policy can be divided into two segments – Government Fiscal Policy and Monetary Policy.

Government Fiscal Policy

The Government Fiscal Policy is merely the use of a budget and/or spending practices. This can have a major effect on Forex Trading.

Monetary Policy

The Government’s central bank has so much influence in the supply and cost of money – generally reflected by interest rates.

Political Factors

The currency market is affected by all types of political conditions – be it internal (internal politics) – Regional (regional politics are country-based) as well as international (these includes major changes in the world’s economy)

Inaugurations for the new president can have a positive or a negative impact of the country’s currency.  Thus changes in the government can have a huge impact on the country’s currency and may also affect the neighboring currencies. Political reports have also been one of the biggest influences in the FX market.

Trader’s mindset

This is known as the Market Psychology, how a trader thinks, and these perceptions influence the FX market either positively or negatively.

It is also important to understand that there are huge role players – i.e. participants in the forex market.

Forex Participants
  • Central Banks
  • Banks
  • Interbank brokers
  • Hedge funds
  • Commercial companies
  • Retail Brokers
  • Investors and speculators

Central Banks

Central Banks play a major role in Forex – as it seeks to control the money supply and ultimately have official targets as well as unofficial target rates for their currency as a national central bank. As we know how volatile the market can get to be, excessive exchange rate volatility shakes the nation and thus one of the important aspects of a central bank is to restore the market during those times.


Banks cater to commercial companies as well as a huge amount of speculative trading – which is the most traded form of forex usage. Huge amounts of dollars (US$) are traded daily, and this is common for large banks.

It is important to know that these trading activities are undertaken on behalf of corporate customers – One of the major facts is that these banks also have their own positions, and thus bank dealers also participate to make a profit for the bank.

Interbank brokers

Forex Brokers were doing tons of business; this was minimized by an increase of internet use.  What they did was to facilitate interbank trading and matching anonymous counterparts for comparatively small fees.

A lot of business is moving towards the use of electronic systems.

Hedge funds

A flexible investment company for a small number of large investors (usually the minimum investment is $1 million); can use high-risk techniques (not allowed for mutual funds) such as short-selling and heavy leveraging (lingoes explanation)

Commercial companies

Commercial companies are known as the backbone of the FX market – is due to their trading exposure.  Fun Fact is that they can be protected if a certain move is unfavorable to them and hence that’s why the market exists.

Retail Brokers

These are non-bank brokers – those that hosted by the internet. They offer dealing platforms (Trading Platforms such as Metatrader), Analytics, signals, advise, etc. to retail customers of which may be FX traders.

Banks do not offer trading services to retail customers and thus we have retail brokers.

Investors and Speculators

The commercial participant hedges the risks taken by the speculator.


We’ve spoken of a variety of factors affecting the forex market – which are economic and political conditions (this is when the market, in general, is analyzed, peaking at the economy and our national politics).

Some of the most obvious factors affecting our currency are interest rates and inflation. Fun fact is that, at times, the government itself participates in the Foreign Exchange Market to boost their national currency.  The Method they use is known as Central Bank intervention.  The volatility of the market is caused by large market orders – and thus no one can really control the market or rather influence or drive the market for any length of time.

One of the most used forms to forecast the market or to where the market will be headed which is one of the factors affecting the market is the News. It is important to follow the economic calendar (it’s a schedule for the economic news) which has a direct almost immediate effect on the market.

Recommended channels are: for USD, CNBC, for CAD Rob TV, for EUR, Bloomberg TV – or simply follow the economic calendar here.

Those are factors affecting the market. 

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