Factors affecting currency trading

Factors affecting currency trading

Currency trading is selling and buying one currency to another country currency. Each currency pair consists of individual trading currency such as EURO and the USD or the EURO/USD pair. In this pair, the first currency (EURO) serves as the base currency, which is quoted relative to the second currency (USD) which serves as the quote or counter currency. The first currency is expressed in dollar according to the prevailing exchange rate.

Every day, heavy trading occurs in foreign exchange market making the spot market as the most liquid market in the world. The most heavily traded pairs are the Euro/USD dollars that account for the 28% of the total trading in a day while the USD/JPY occupies the second position with 14% of the total trade. The USD on the other hand, is the most involve currency having a share of 84% of all transaction with Euro trailing behind with 39,1% of the total trade.

Market movements:

Currency trading is largely affected by the way the market reacts negatively or positively to certain factors affecting one currency. Oftentimes, inflation in the country affects the currency value because of the perceived diminishing purchasing power and demands for that certain currency.

Impact of the Economy:

The impact of the economy also affects the currency value. When the country’s economy is seen as robust and healthy, the more in demand the currency will be and the better it will perform in the spot market.

Political Reasons:

Political conditions in the country also have big impact on the performance of the currency in the foreign exchange market. Most of the time, the currency value reacts negatively to any political unrest or sudden change of government or any perceived instability in the ruling government. Traders may positively or negatively react thus affecting the exchange rate for the currency.

International Events:

Currency trading is also greatly affected by any upsetting international events. This is the time when traders try to move their assets to a safer place during an unfavorable international setting in the certain country thus affecting negatively its exchange rate. Traders traditionally find the US Dollar, Swiss franc, and gold as the safest place for their assets thus greatly affecting the price of this currency.

If you are interested in currency trading, having some background information on what affects the currency market will greatly help you to have a safe play. The market is always moving and sometimes in your favor or against. Your ability to analyze it and your ability to perceive future events will help you maximize your gains and minimize your loss.

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