What influences prices in the forex market?

Prices in the currencies market are affected by macroeconomic factors, such as inflation, unemployment, and industrial production. Information on events such as these is easy to find and are based on their analysis of economic data, which traders take positions on the market to make profit.

There are three main macroeconomic factors a trader should focus on when analyzing foreign exchange rates:

Interest Rates: Each currency has an overnight lending rate attached to which is determined by that country’s central bank. Lower interest rates usually lead to depreciation in the value of the country’s currency

This is largely due to traders who execute carry-trades. A carry-trade is a trade where a currency with a low interest rate is sold and a currency with a high interest is bought. This is based on the idea that currencies with higher interest rates will generally rise in value, and will rollover and allow trades to earn interest on a daily basis.

Employment: The unemployment rate is a key indicator of its economic strength. If a country has a high unemployment rate, it means its economy is not strong enough to provide people with jobs, and thus, leads to a decline in the currency value.

Geopolitical Events: Key international political events that affect not only the foreign exchange market, but all other markets as well.

Fundamental Analysis Techniques

How does fundamental analysis explain long term trends?

Fundamental analysis is very useful for determining long-term trends within a currency pair. By focusing on long term economic factors that affect countries, fundamental analysis predicts long term trends.