Factors That Shape the Forex Market Trends

Traders and investors rely on market trends to trade in the forex market. Regardless of the time frame of the investment, a change in prices generates profits or causes losses in a market. Various factors affect these prices in the currency trading market.

There are a few factors which have a major impact on the market, causing both short-term and long-term fluctuations.

Major market factors
Major market factors are the forces that create changes in the foreign exchange market. As the major market-changing forces affect the trend, learning how these trends shape up the market helps traders to gain insight into the future of the market. Traders can find out why certain trends develop or die; they can also predict how future trends might occur by focusing on the major factors such as forex indicators. There are four major factors that create market trends which are given below:

Government Policy
Any free market is strongly influenced by the government policies. The financial marketplace will get affected by the fiscal and monetary policies adopted by the government. Government and central bank can increase or decrease the rate of interest to accelerate or slow down the growth rate within the country. This is known as monetary policy.

Government can increase or decrease its spending under the fiscal policy adopted it to stabilise prices and increase employment. Government can control and change the investment flow in and out of the country by regulating interest rates and amount of currencies available in the open market.

International Transactions
The flows of funds, inwards and outwards, affect the economy of a country. International transactions that a country makes with other countries have an impact on its currency. When money flows out of the country, its economy weakens. If exports are more than imports of goods and services, money is flowing into the country. Therefore, countries try to keep their imports lower in comparison to the exports made. The fund brought in by export transactions is reinvested to stimulate the financial market.

Speculation and Expectation
Today’s act impacts the future. This is not just a philosophical thought but holds true for the economy as well. Speculation and expectation are important parts of the financial system since investors, traders and other participants believe that the future trends are shaped by current acts. Sentiments prevalent in the market indicate future trends in the forex market. Traders analyse sentiment of certain groups along with fundamental and technical indicators to find out their future direction. Sentiment plays a crucial role as speculation and expectation of the participants can lead to bulk buying and sell outs in the market.

Supply And Demand
Demand and supply shape the trends in any market. With change in demand and supply, the prices and rates also change. When the demand is higher than the supply, the prices rise proportionately with demand. Prices fall when supply increases in comparison to demand. If the supply is stable at a point, then demand holds a sway on the market affecting prices with its increase and decrease.

Forex market is affected by various economical and political developments around the world but trends are generally created by four factors: government, international trade and transaction, speculation and expectation and supply and demand. Traders must keep an eye on these major forces when they are investing in the currency market.