As one of the largest and most accessible financial markets in the world, the forex market offers countless trading opportunities for traders globally. At its core, forex trading involves exchanging one currency for another, with their values measured relative to each other — this relationship is known as the exchange rate.
There are two main types of exchange rates: fixed and floating.
A fixed exchange rate is pegged to another currency and maintained by the local government until it decides to adjust it.
A floating exchange rate, on the other hand, is determined by market forces — primarily supply and demand.
So, what influences these forces? And which factors should traders pay attention to when predicting currency movements?
Let’s explore the key elements that affect medium- and long-term foreign exchange trends.
Interest Rates
Higher interest rates often lead to stronger currency values, as they attract foreign investors seeking better returns.
Interest rates represent the cost of borrowing money — or the reward for saving or investing it — and are typically set by central banks. When a country raises interest rates, foreign investors are more likely to invest there, converting their currency into the local one. This increases demand for the local currency and pushes its value higher.
Because of this, keeping track of central bank announcements is vital for forex traders.
Inflation
Inflation measures how much the purchasing power of a currency declines as the cost of goods and services rises.
When inflation increases, each unit of currency buys fewer goods, weakening its value. This can happen due to rising production costs or higher demand for limited goods.
Conversely, when inflation is low, a currency’s purchasing power is higher, which strengthens demand for it and boosts its value in the forex market.
International Trade
A nation’s balance of trade — the difference between exports and imports — plays a significant role in determining currency value.
Countries that export more than they import tend to experience stronger currencies. For example, if global demand for UK goods increases, foreign buyers must purchase British pounds to pay for those goods, raising demand for and the value of the pound.
Trade balances are also influenced by inflation. For instance, if inflation rises in the US, American-made goods become more expensive, reducing demand for them and weakening the US dollar.
Economic and Political Stability
A country’s overall economic health — reflected in indicators such as GDP growth, inflation levels, and the balance of payments — has a direct impact on currency value.
If a nation spends more on imports than it earns from exports, its currency may depreciate due to increased demand for foreign currencies.
Political stability also matters. Economies governed by stable, transparent administrations tend to inspire investor confidence, attracting foreign investment and strengthening the local currency.
When investors trust a country’s long-term growth potential, they are more inclined to hold its currency, increasing demand and value.
Speculation
Market sentiment and investor speculation can also move exchange rates significantly.
If traders expect a currency to appreciate — perhaps due to anticipated policy changes or global events — they may buy more of it in advance, increasing demand and driving up its price. Similarly, negative sentiment can lead to sell-offs and depreciation.
Because the forex market reacts quickly to expectations and news, speculation is a major driver of short-term volatility.
Final Thoughts
Currency exchange rates are shaped by a combination of economic indicators, political factors, and market sentiment — all of which can create sharp fluctuations in forex prices.
That’s why it’s essential to combine fundamental analysis (studying factors like interest rates and inflation) with technical analysis (examining price charts and patterns) when developing your trading strategy.
You can sharpen your skills and test your strategies risk-free on a Deriv demo account, preloaded with virtual funds, before trading with real money.
Get high-accuracy trading signals delivered directly to your Telegram. Subscribe to specialized packages tailored for the world’s top markets:
Free Crypto Signals Subscribe via Telegram
Free Forex Signals Subscribe via Telegram
Free VIP Signals (Gold, Oil, Forex, Bitcoin, Ethereum, Indices) Subscribe via Telegram
Free Trading Acoount Open With ORON LIMITED Signals (Gold, Oil, Forex, Bitcoin, Ethereum, Indices)
Open Account
Not profitable? Don’t worry! Join our copy trading system where we provide lower risk returns. Benefits of Joining Us:
-Lesser Risk as lot size is minimal
-Higher returns (approx. 5% to 10% monthly)
-Easy Deposit and Withdrawal with USDT using crypto wallets
-Lesser Drawdown
-Instant Support
-Invest Now and get guaranteed returns with us. DM us for more info❤️
-Start Now
*Copy Trading is free but we charge some percentage of profit as fees.*
Full VIP signals performance report for September 22–26, 2025:
