What moves forex market?

[zebrafx]

In today’s piece we’ll discuss what causes the price of a currency pair to move up and down. As you’ll shortly discover, price movements in the FX market are not random.

So what moves forex market? The short answer is supply and demand. Of course, this is a very general answer as supply and demand are behind the movement of just about any product or service, not just forex.

To get into specifics, the greatest mover of prices in the FX market are interest rates. A simple example might help. Imagine that you would like to open a checking account and you compare two different banks, Bank A and Bank B. If Bank A offered a 5% interest rate while Bank B offered 2%, which would you choose? Hopefully the answer is obvious, Bank A, since the return is far higher.

How does this relate to FX? In the forex market, the interest rate offered by a currency’s central bank is what determines its future price. If interest rates are expected to rise, the price of the currency in relation to the other will move up, and vice versa.

With this knowledge in mind, traders can hopefully see why speeches by central bank members have a significant impact on the FX market since what they discuss could impact future interest rate policy. This commentary often causes a currency pair to rally or fall by 100 pips and sometimes more. There are also other economic events which impact the forex market.