Currency prices are simply determined by supply and demand or the amount of buying or selling of various currencies in the Forex market. Similar to the stock market, the price of a currency will fluctuate throughout the day on the Forex market with forces of supply and demand determining whether the currency rises or falls. When there are more buyers the currency will rise, and when there are more sellers, the currency will fall.
Some factors that affect currency prices are important to know so you can take them into consideration when going into the market to place your trades. Rises in interest rates in a country will result in that currency appreciating in value. It does this because of a higher interest rate provides better incentives for individuals to invest in cash. A rise in interest rates will also attract more foreign capital into the country and as a result. Demand for currency increases, therefore, it will see rise and fall.
Another factor to be aware of is inflation, which means a persistent rise in prices related to an increase in money. Countries that have lower levels of inflation because a currency to appreciate in value because there's less being injected into the economy. When inflation is low, the cost of service will rise quite slowly.
Political stability also has an effect. It largely affects currency prices, as a government with a stable economy is less risky for investors and ultimately, a more desirable place to invest your funds. Governments with strong economic and trade policies remove any doubt from the market and ultimately the strength of the currency. The final factor that tends to affect currency prices is commodity prices; when commodity prices rise, the countries that export heavily are likely to see their currency rise as they are getting more money in exchange for their goods.
The opposite is true for of countries who are larger importers of commodities, the higher import costs are means the cost of manufacturing will become higher, causing profit margins to squeeze. This is important to know because when you are watching the news or scrolling for news events before placing your trades, you will have a better appreciation for what is going on in a certain country and if that is good or bad for their currency. Shawn Lucas is the head trader for The Apiary Fund, and he insists that checking for news events before you place your trades every day is not only an important habit for a trader to develop, but Shawn Lucas says it can dramatically save or destroy your profits.