Currency rates fluctuate constantly throughout the day depending on whether one currency is in higher demand than another. Since the Forex market covers currencies from all over the world, there are many factors that determine the direction of currency pairs based on their perceived value for goods and services or for investment.

If you want to learn how to trade Forex, you need to know about the factors that influence the value of a currency.

Economic data

The value of a country's currency is largely determined by the health of the economy of the country that issues it. Forex markets react to key economic data from countries because this information provides insight into how each country's economy is performing, as well as how it compares to other countries.

One of the most important indicators for assessing a country's economic performance is its Gross Domestic Product (GDP). This indicator measures the value of all the finished goods and services that have been produced in a country over a given period of time.

Political news and events

Currency rates also react to political news and events at home and abroad. The US dollar acts as the world's reserve currency and is therefore considered the safest. This contributes to its value increasing during periods of macroeconomic uncertainty and political instability.

An example of the impact of a political event on a currency is the conflict between Russia and Ukraine. After it began, Western countries imposed sanctions, as a result of which the Russian ruble lost a third of its value in two weeks. Later, the ruble recovered against the backdrop of rising oil and natural gas prices.

Interest rates

Another important factor for the currency market is the tightening of the country's monetary policy in order to reduce inflation. Higher interest rates attract investors - they hope to get a higher return on their money. For this reason, Forex exchange rates tend to move in favor of the currency with the highest interest rates.

Commodity prices

Commodity prices affect the direction of exchange rates. This depends on whether the country that issues a particular currency is a net importer or a net exporter. Currencies of countries that export large volumes of commodities, such as the Australian dollar (AUD), New Zealand dollar (NZD) and Canadian dollar (CAD), are called "commodity" currencies.

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