What is Foreign Exchange Rate?

Foreign exchange rate is the rate at which two currencies are exchanged. While trading, there must be a seller who wants to sell a currency and a buyer who wants to buy the currency, and the two currencies are exchanged at an agreed price.

Why do foreign exchange rates fluctuate? This is because of the relationship between demand and supply. The exchange rate is basically correlated to the national power between two countries. There is an increased demand for the currency of a country with strong economic strength and it becomes more valuable, and there is a less demand for the currency of a country with weak economic strength and it becomes less valuable.

For example, let’s compare the two currencies: USD and EUR. When there is a low demand for EUR and a high demand for USD, the value of USD will rise. On the basis of constantly changing global economic situation and world news, an investor decides whether he will buy or sell a currency. Therefore, foreign exchange rates fluctuate frequently.

Understanding the timing of fluctuations in the foreign exchange market

In order to understand the timing of fluctuations in the foreign exchange market, firstly, it is necessary that you know the global economic situation and world news. Even though binary options trading is said to be simple since they are traded with only two options, as a beginner, you may think that binary options trading is difficult when you heard that it is a type of investment.

However, binary options trading is not as difficult as you thought. You can learn the trading skills and analytical strategies used by professional investors. Now it is important that you take an interest in what is happening in the world right now and know about the latest breaking news around the world.

Why should you pay attention to the global economic situation and world news? This is because exchange rates fluctuate according to the economic indicators and world situation. It is very likely that there are large changes in exchange rates when important events happened. Understanding the world situation will help you to make a fair judgment. For example, “According to the news report, the U.S. economy is going up. Thus, the value of the U.S. dollar rises.”, “An incident is reported, thus, the Japanese Yen falls in value and the Euro rises.”

For example, the World Trade Center in the United States was attacked by terrorist on September 11, 2001. After hearing the shocking news, investors sold U.S. dollar and bought Euro or Japanese Yen due to concerns about the economy of the United States. And then, since terrorism seems to have little impact on the U.S. economy, investors began to buy U.S. dollar again. News reports on major incidents have a great impact on the financial markets.

In addition, there are patterns of fluctuations in the exchange rate change. From time to time, you may find yourself in a similar situation. This is a characteristic feature of Forex trading. If you pay attention to the global situation and world news, you would be familiar with the patterns and seize the opportunity.

Learning the Basics

At first, it may be difficult to remember all the basics. Therefore, it is better that you practice and are familiar with the trading to a certain degree, and then trade by using all the basics.

The economic indicators, for example, economic performance, interest rate and balance of international payments, have a great impact on the relationship between demand and supply. There are a lot of factors in the economic fundamentals and they are called “fundamentals”. The exchange rates fluctuate according to the various economic fundamental factors

Economic Performance

A country with strong economic performance tends to attract investors to buy the currency because they expect that the stocks and interest rates will rise. On the other hand, investors tend to escape from the assets of a country with weak economic performance and sell the currency, thus the value of the currency will fall. Since the economic indicators, such as employment rate and GDP, are very important in that they have a great impact on the exchange rates, it is essential for you to pay attention to these indicators.

Interest Rates and Prices

Generally, currencies tend to flow from a country with low interest rates to a country with high interest rates. Therefore, investors tend to buy the currency of a country with high interest rates and the value of currency will rise. Federal Open Market Committee (FOMC) makes decisions on the monetary policy of the United States which is the center of world economy. Therefore, it is very important for you to pay attention to the FOMC policy statements and minutes.

Balance of International Payments

In brief, balance of international payments is a statistical record that includes how much money is coming in and how much money is flowing out of a country. As a factor which influences the exchange rate, it is very important to pay attention to the real demand that is caused by the current account and capital account, which are broad measures of trade balance and service balance. In addition, as one of the factors that influences the exchange rate, it is also said that a current account surplus indicates that the value of currency of a country will rise.

Foreign Exchange Intervention

In order to control the excessive volatility of exchange rates and adjust inflation and deflation, monetary authorities will carry out foreign exchange intervention. Although the intervention is not frequently carried out by monetary authorities, it is coordinated intervention carried out by several countries. Since it has a great impact on the exchange rates, it is also important for you to pay attention to the foreign exchange intervention.

There are also other fundamental factors can influence the exchange rates, such as, technical factors that are not related to supply and demand, speculative factors, geopolitical risks, etc. Understanding the world situation can lead to improvements in making investing decisions. Since there are a lot of information available and they can be used as investment strategies, it is better that you utilize these strategies to make improvements.

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