Understanding Forex Price Drivers: Key Factors for Traders

If you have spent any amount of time trading the Forex market, you know that Forex prices can change rapidly. There are a number of things that influence Forex prices, you need to be aware of all of them if you are going to be a successful trader. Here are some factors that affect Forex prices regularly.

Global Interest Rates

The biggest factor that affects Forex prices are global interest rates. Interest rates, in different countries, will impact many different currencies at the same time. In the world of Forex, the interest rates that are announced by the Federal Reserve in the United States have a huge impact on the rest of the market. Whenever the Federal Reserve announces a change in the interest rate that they loan to banks at, it is going to have an impact on the value of the dollar. Since the dollar is involved in nearly 90 percent of all Forex transactions, this has a big impact on the entire market. Interest rates can drastically affect the amount of inflation that is taking place in a currency. Therefore, if you plan on trading in the market, you need to be aware of changes in global interest rates.

Economic Growth

Another important factor that can drastically affect the value of Forex prices is economic growth. In the world of Forex trading, you are essentially choosing one currency over the other. If you buy the EUR/USD pair, it is because you think the Euro is stronger than the Dollar. This essentially means that you believe the European economy is going to grow at a stronger rate than the United States economy. Whenever a country's economy is growing, that will be reflected in the value of their currency.

Housing Data

Housing date is another factor that can affect Forex prices. Housing data is regularly announced every month. When it is announced, it typically sends shock waves throughout the Forex market. This is especially true with housing data in the United States. They will announce how many new homes have been built, and how many homes have been sold over a specific period of time. This is an economic indicator that can usually predict what is happening in a specific economy.

Market Sentiment toward the Dollar

As stated earlier, the United States dollar is by far the most commonly traded currency in the world. Because of this, Forex traders everywhere pay special attention to the dollar and its relative value. One of the biggest factors in determining Forex prices is the opinion of traders about the US dollar. If traders think that the US dollar does not have much value, that will be reflected in the prices of Forex currency pairs across the market. If they believe that the US dollar is gaining strength, they are going to be selling any pairs that end in USD because they believe that it will be going up in value.