What Makes Currency Pairs Move?

Understanding What Currency Pair is?

A currency pair is a quotation of two different currencies, where one is quoted against the other and is often traded in the foreign exchange market. A currency pair's first listed currency is referred to as the "base," while the second listed currency, which serves as the benchmark is known as the "quote." Knowing that there are two types of currencies, namely; THE BASE and THE QUOTE, we will also highlight their use in the trading market.  

The base currency: It is the currency that is quoted first in a currency pair. In the case of EURUSD, the Euro would be the base currency. Similarly, the British pound is the base currency of GBPUSD (GBP).

The quote currency: You know that the quote currency is the one that comes second in a pairing by process of elimination. The US dollar is the quote currency for both the EURUSD and the GBPUSD.

Currency pairs trading in the forex exchange market have played a vital role in the enablement of the buying and conversion of currencies for international trade and investing.  In essence, a small number of international commercial banks handle the majority of the amount of currency exchange, and the movement of currency pairs is not governed by a single entity such as a regulatory body but is dispersed and influenced by the governments through the central banks to carry out monetary policies and commercial banks to route the trades.

What Makes Currency Pairs Move?

Daily occurring events are basically and have been said to be the basis for currency pair movement because every second, events are happening and any news could cause the forex market to fluctuate, hence leading to the movement of currency pairs. Although sometimes as a trader, you might assume that currency pairs would move, assumptions, as regards the movement, can sometimes be incorrect, which is why we have come up with factors to guide you through what makes currency pairs move.

Factors That Influence Currency Pair Movement

Central Bank Rate Decisions: Central bank board  generally meet several times each year to conduct monetary policy by setting the base interest rate. This rate determines the interest rate for lending money between institutions, thereby controlling the economy's money flow, and decisions made in these meetings may cause currency pair rates to rise or fall. Some key decision-making banks under the central bank boards include the Federal Reserve Bank, European Central Bank (ECB), Bank of England (BoE), Reserve Bank of Australia (RBA), and Bank of Japan (BOJ). Recently, the Federal Reserve Bank brought the rate down to 0, which happens to make finance cheaper. 

Employment Data: The rate of unemployment has an impact and guards the overall state of the economy. Usually, employment data and news arrive on the first Friday of the month, which is also when the US Bureau of Labor Statistics reports the non-employed report. This, therefore, crosses the US dollar and causes it to experience wild swings during this event, as the worldwide market is digesting the news. At this point of crossing, you would majorly see the price move over 1% in a different direction. 

Economic Growth: Every quarter, financial traders are always on the lookout for the GDP (gross domestic product) reports to survey the economy's general well-being. These GDP reports show the annualized change in the inflation-adjusted value of all the goods and services created in the economy annually. However, since forex exchange is in pairs, it is enough for one country to miss its gross domestic product evaluations to set off a fierce reaction. Therefore, investors sell it off to purchase a more promising one.

Inflation: Inflation and interest rates are closely related, and both influence currency pair movement. Some inflation, which leads to the rising costs of labor and products, is good for an economy, as it shows increasing demand versus supply. However, consistent inflation can be an issue, as labor and products become more expensive. Inflation is usually measured by the change in the price of goods and services, which is also known as the Customer Process Index (CPI). The CPI is a controlling tool for monetary policy which is used by the central bank to monitor inflation, which would serve as a guide during the decision-making to change interest rates. However, the CPI has some shortcomings, hence making it an imperfect measure, which includes customers' switching their purchases depending on the elasticity of the demand and the inability to account for quality improvements for certain goods. 

Interest rate: The rates at which interest is been leveled up or lowered to contribute to a large extent to the currency pair movement in the forex market. The national banks earlier mentioned use a financial approach to manage their local cash, expansion, GDP, work levels, or customer spending. Therefore, these financial approaches can be used to decide whether or not to change the interest rate, and each time this change happens, it brings about an excessive change in currency pairs. Interest rate decisions are by far the most influential indicators that move the forex market because there are eight central banks around the world controlling their local currency through monetary policy. However, based on fundamental data like inflation, gross domestic product, employment levels, or consumer spending, they decide whether or not to change the interest rates. When this change occurs unexpectedly, it results in extreme volatility in the market.  

Trade: A country’s trading relationship with the remainder of the world can influence its currency pair. Countries that export more than they import, also known as having a trade surplus, would have more stable monetary currencies than those with import and export imbalances. Trade is often used as a leading indicator for currency pair movement each month. 

Commodities: In countries like Saudi Arabia, Russia, and Nigeria, commodities usually have a high effect on currency pair prices. The exchange rate of the currencies is attached to their particular product exercises, based on the fact that the strength of the economy can be unusually subject to the costs of their normal assets. For instance, if organizations outside the UK purchase labor and products from the UK, they will normally pay for them in pounds. This means that the more a country trades, the higher the interest rate on its currency.

Conclusion

Understanding what causes currency pairs to move is one of the best ways to make money in Forex. Sometimes, financial investors are also contributors to the movement of currency pairs because they tend to trade with their choices as per what they see. Most of the time, this is done because they see something happening on a very basic level in the global economy that leads them to believe a currency will weaken or because they see something happening that leads them to believe a currency will become more fragile. Sometimes, as a trader, you could expect that currency pairs will move, but they do not. Rather than accepting that the forex market will move or not, we have come up with the above indications to guide you as a beginner to make profitable and resourceful trading decisions.