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What really affects forex trading?

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The forex market is a global marketplace where traders from across the world buy and sell currencies of trillions of dollars every day. The Forex rate is very important in determining the economic health of a country. Being one of the largest global financial marketplaces, the forex market is affected by macroeconomic events that play a significant role in market activity. Click here to see the best forex broker South Africa.

In this article, we are mentioning the major factors that affect the forex market.

1- Interest Rates

Interest rate is one of the major factors that affect forex trading. Interest rates, forex rates, and inflation are all correlated.

If interest rates are higher, holding the national currency generates bigger interest payments that in turn produces more opportunities for the growth of profit. As a result, more foreign capital is attracted to the country, which causes a rise in exchange rates.

On the contrary, if rates are lower, profit opportunities are also minimized and the currency is considered less valuable that causing people to try to sell it off. With decreasing demand, the value of the currency falls.

2- Inflation Rates

Variation in the market inflation causes variation in the currency exchange rates. In a country where the inflation rates are low, you will see an appreciation in the value of its currency. The prices of goods and services rise at a slower rate where inflation is low.

A country with a constantly lower inflation rate has an increasing currency value while a country with a higher inflation rate usually sees a depreciation.

3- World Events

Geopolitical events such as elections, crises, wars, pandemics, etc. can all affect the strength of a currency in the forex market. Moreover, lot size in forex play important role.

A positive event or news can attract foreign investors, with an increase in foreign capital raising the value of the currency.

In contrast, a country in economic, political, or any other crisis can lead to a loss of confidence in foreign investors and a depreciation of its currency value.

4- Government Debt

Government debt, in general, is not necessarily a negative thing. It is national debt or public debt owned by the federal government. It can in the betterment of the infrastructure and boost economic growth. But, when the government debt is too high, it can lead to inflation and as a result currency devaluation.

Foreign investors sell their bonds in the open market if the foreign exchange market predicts government debt within a particular country. This results in a decrease in the exchange rate of the currency.

5- Political Stability

Political stability within a country plays a significant role in the valuation or devaluation of its currency. A country with less risk of political instability is more attractive to foreign investors. As a result, the country becomes more economically and politically stable and the foreign capital increases. This leads to an appreciation in the value of the national currency.

On the other hand, if a country is more vulnerable to political instability, it may see a depreciation in the exchange rates.

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