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3 Fundamental Factors that Drive The World's Currencies

By: Hillel Fuld
The trick to successful Forex trading is effectively predicting the future trends of the market. Of course, this is an impossible goal to achieve fully, otherwise, there would be some very rich people out there. However, the most common debate amongst Forex traders and experts is what tool can come closest to accurately predicting the upcoming movements of the market.

There are those experts that will tell you that technical indicators is the only real way to know what will happen tomorrow. They will keep repeating the phrase “The trend is your friend” till they're blue in the face. The basic premise is that what the dollar does today, it will continue to do tomorrow. These experts believe that there is no logical reason a currency should reverse its trend for no apparent reason. They will tell you that if you analyze the charts and stick to technical analysis, you will be fine.

On the other hand, with the exact same enthusiasm, other Forex experts will tell you to trade with one eye on your trading platform, and the other glued to the news and fundamental analysis. They might agree that “The trend is your friend”, but explain that that only applies as long as there is no major news announcement or market development to make the trend your biggest enemy.

The fact of the matter is, if you want to have all your bases covered, you must trade and conduct your Forex account with moderation. Make use of both of these tools as well as some others, and that way, you can get the best of both worlds.

The following is a list of some of the major factors that drive the US dollar as well as other currencies:

  • Supply and Demand : When the US exports services or products, this automatically creates more demand for the US Dollar. The customers buying these services have to pay the US in dollars, forcing them to exchange their currency for dollars. By increasing this demand, the currency rate of the USD goes up.

    This same principle applies when the US economy is doing well. A strong American economy causes foreigners to want to invest in American companies, forcing them to exchange their native currency into dollars. 

  • Psychology and Sentiment : The common perception of a country's economy has an effect on its currency to a level that should not be ignored. To continue our previous example, if the American economy is perceived as weak, and unemployment numbers are up, this will of course have the opposite reaction. People will have motive to begin selling dollars and buying back their country's currency, lowering the demand for dollars, and thereby decreasing the rate of the USD.

  • Technical Factors : Now that we have established that the trick is determining what will be higher, the supply or demand, and what will be the common perception of the dollar or any other currency, the question is, how do we determine what we should expect tomorrow?

    In order to make an educated decision about future trends, and thereby open smart positions, you need to pay attention to various news items, events, and statistics released by the governments. Some examples include payroll, GDP, and unemployment data. This kind of information will help you assess whether the economy of the country at hand is weakening or strengthening, and will therefore paint a clearer picture of what to expect from its currency. Once you are on top of the various types of data released, the market's technical indicators, support and resistive levels is where you should be looking next. 

You will find that all three of the above trading tools will point you in the same direction 90% of the time, giving you the knowledge and ability to trade intelligently.