The value of a country’s currency is affected and largely influenced by various economic indicators that reflect how a country is performing. The macroeconomic events that take place internally and internationally are factors that will have a huge effect on the value of a currency. As a forex trader you need to be constantly on top of these data – always ready to read and interpret reports as they are released.
When you talk with the more successful investors and traders in the forex market many of them will lay claim to the fact that the driving force behind their success has been their ability to skillfully predict the movements in the market. In order to profit from trading within the forex market traders must have a fairly thorough understanding of the factors that affect the movement of a currency's rate of exchange.
The biggest influencers of market movements of course are the announcements and policies made by a country’s central bank and the important monetary authorities. The most important data indicators are the interest rate announcements and monetary policy statements released by the countries central banks. For example the European Central Bank (ECB) and the Federal Open Market Committee (FOMC).
The value of a country's currency increases coincidentally with a rise in interest rates. The increased value of the currency reflects what is called capital appreciation and this consequently affords the investor the opportunity to profit. Every currency rate comes packaged with an interest rate attached. Interest incomes are generated by buying currencies of countries with high-interest rates and finance these purchases with currency from countries with low-interest rates.
Forex traders should always determine whether or not the currency is dependent on its country’s trade and capital flow before making a final prediction regarding the movement of a particular currency. Capital flow can be defined as to the amount of investment a country receives from international sources. However, trade flow refers to the income resulting from trade. This is one important factor that you need to consider while predicting the movement in the forex market.