What moves the FX market

Interest and Inflation Rates

The Central Banks set the benchmark interest rate to control the rate of inflation.

If inflation is persistently high, the Central Bank will raise the benchmark rate to slow the rate of growth. This makes it more costly for banks to borrow money and the cost will be passed on to retail customers leading to an overall reduction in spending.

If the central bank wants to stimulate the economy to expand growth, it will lower the interest rate and make the cost of borrowing cheaper so as to encourage spending.

The higher interest rates attract investors seeking high returns and increases the demand for the currency.

Higher interest rates will lead to appreciation of currency value.

Quantitative Easing

QE is the direct market intervention by the central bank in a bid to increase the supply of money within the economy. The central bank does this by purchasing government bonds and other assets from banks, thereby providing extra liquidity.

QE is the last resort in a bid to boost the economy.

QE devalues the currency.

Trade Balance

trade balance = total exports – total imports

More exports than imports lead to positive trade balance,

More exports lead to higher demand for the currency of the export country, which leads to appreciation of that currency value.

Foreign Investment

Foreign investors are concerned whether a country has potential for return and safety of funds. Demand for assets in the country by foreign investors increases when the 2 conditions are fulfilled leading to the appreciation of currency value.

Speculation

Pure speculation by hedge funds and investors affects the demand and supply of currencies.