Being capable of identifying trends is one of the core skills a Forex trader should possess, as it can prove to be highly useful in making any Forex market prediction. If you have decided to join this market, then you have to know that the forex market trends can be influenced by several factors, and make yourself familiar with them. There are basically four major factors that affect the Foreign Exchange –a country’s economy, political conditions, market psychology and supply and demand.
The value of a nation’s currency fluctuates regularly due to a large scale influence its economy. It is unmistakable that a nation’s economic factors significantly affect its currency’s value. The question is how these factors relate to forex and, therefore, in what way the economy influences the currency. Taking into account the state of the currency value and trends is a great strategy to keep up with globalization. Economic factors influence the currency market mainly by the concept of demand and supply. A few examples of additional factors that affect currencies are interest rates, inflation, and economic growth and political stability.
Economic indicators tell us about the state of a market in the form of statistics. Analyzing economic indicators can help us predict future performance. Some common economic indicators include indices such as GDP, unemployment rate, industrial production, stock market and money supply. When a market follows a trend, this is most likely shown by certain associated economic indicators that shape the market. Trends are important because they offer unique opportunities for profits. Let’s look at some of the major factors influencing market trends.
International transactions, the balance of payments between countries and economic strength are harder to gauge on a daily basis, but they also play a major role in longer-term trends in many markets. The currency markets are a gauge of how well one country's currency and economy is doing relative to others. High demand for a currency means that currency will rise relative to other currencies. The value of a country's currency can also play a role in how other markets will do within that country. If a country's currency is weak, this will deter investment into that country, as potential profits will be eroded by the weak currency.
As stated above, trends are generally created by four major factors: government, international transactions, speculation/expectation and supply and demand. These areas are all linked as expected future conditions shape current decisions and those current decisions shape current trends. Government affect trends mainly through monetary and fiscal policy. These policies affect international transactions which in turn affect economic strength. Speculation and expectation drive prices based on what future prices might be. Finally, changes in supply and demand create trends as market participants fight for the best price.