The primary objective of forex market participants is to exchange one currency for another in order to profit from changes in exchange rates.
Exchange rates are determined by a number of factors, including economic indicators, political events, market expectations and technical analyses.
As in any market, the exchange rate is determined by the interaction of supply and demand.
If demand for a particular currency exceeds supply, its exchange rate appreciates.
Conversely, if supply exceeds demand, the exchange rate falls.
Market makers and large financial institutions play an important role in the formation of exchange rates.
They provide liquidity in the market by setting prices for buying and selling currencies.
The interbank market, where the world’s largest banks exchange currencies, also has a significant impact on exchange rates.
Central banks of countries play a key role in determining exchange rates.
They can influence exchange rates through monetary policy, including changes in interest rates, intervention in the foreign exchange market, and regulation of the money supply.
For example, a rise in interest rates can attract investors to a country by increasing demand for its currency and raising its exchange rate.
A strong economy attracts investment by increasing demand for a nation’s currency.
Political stability and events such as elections, changes in government, or geopolitical conflicts can significantly affect exchange rates.
An unstable political situation may cause capital outflow and depreciation of the national currency.
Market participants’ expectations of future events and economic performance also affect exchange rates.
Speculation and rumors can contribute to significant fluctuations in exchange rates, even if actual events have not yet occurred.
Exchange rates are determined by the complex interaction of many factors, including supply and demand, central bank actions, economic indicators, political events, market expectations and technical analysis.