Factors Affecting Currency Pairs
Forex exchange rate is a comparison of the price of one currency compared to the price of another currency. Currency pairs compare the economic strength of 2 countries. Following are the factors that affect the value of a currency pair:
Political Events
Government instability, corruption and changes in government can affect the value of a currency. For example, when president donald trump was elected president of the US, the dollar exchange rate soared.
Economic Policy
From a fundamental point of view, traders should keep a close eye on reports on unemployment, GDP, monetary policy and fiscal policy which have an impact on currency values. The economic calendar also shows upcoming events that could shake up financial markets.
Technical Analysis
Technical traders tend to prefer key price levels (support & resistance), trends and other indicators to form the basis for their trading.
Purchasing Power of a Currency
If a country's economy is growing, the money supply must also be increased to keep prices stable. Otherwise, prices will decrease because the quantity of goods and services will increase faster than the money supply, resulting in deflation. When the money supply is faster than the economy, it leads to inflation. Therefore, goods and services have intrinsic value and limited quantity, so the price of goods and services is determined by the quantity of money available in the market.
So, if one unit of currency can buy goods and services with the same amount or even more than 1 unit of another currency, that currency is more valuable. Because it is more valuable, the demand for that currency will be more. The government of a country can change the amount of currency in circulation at will. Because of this, governments are usually forced to print money or increase the money supply to solve fiscal problems.
Gold has the same value in any part of the world. Gold is an element that does not have a variety of qualities. The demand for gold is constant among countries because gold is used as a store of value. Gold is an element that has a finite amount that cannot be created, so it can be used as a universal currency.
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