There are numerous aspects that can influence a country’s currency. The factors that strengthen or weaken a specific currency, and the traded-in-pairs component of the foreign exchange markets will be the topic of this article.
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Traded in Pairs
Currencies are always traded in pairs, which is the primary thing to understand about them. In essence, pairs signify a fraction, or a ratio between two given numbers. One example is the US dollar. You cannot purchase or sell this currency without having another currency to trade it with. When talking of the EUR/USD Asset, the meaning of it is how much US dollars 1 euro is able to buy. In this case, the euro is named the base, and the USD is termed the quote. During the past five years, the EUR/USD has been traded at an average of 1.3 dollars for a single euro.
This equation might help in better understanding these terms.
EUR/USD = Base/Quote = 1/1.3
While dealing with the EUR/USD, there are two factors to consider: the strength of the dollar, and the strength of the euro. If the euro strengthens, as a result the EUR/USD asset value is likely to rise. In case the dollar strengthens, the EUR/USD asset worth is inclined to reduction, this is in the case that the dollar price is at the bottom half of the fraction.
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Factors Which Affect Currency Strength
Traders constantly analyze the worth of currencies, or how much they will be worth in the upcoming future. There are various factors that could impact the value of a given currency, such elements include:
- Employment Reports – Positive information statements on employment mirror a strong economy, and a strong currency.
- Trade Reports – Much like employment reports, trade reports are positively associated with the currency of the country. This includes figures such as the amount or value of goods exported within a specific time frame.
- Housing / Building Reports – If a country is constructing additional houses and buildings, the meaning of this is typically that the population has spending money, which reflects positively on the state of the economy.
- Manufacturing – Positive and optimistic production of goods reflects a strong economy, and indicates a healthy economy for traders.
- Consumer Spending – Experts interpret consumer spending as positively linked to the strength of a given currency.
- Gross Domestic Product – This number signifies the financial behavior of the economy as a whole, and is positively associated with the strength of a given currency.
- Inflation – It is negatively linked to the strength of a currency.
- Monetary Policy – A currency’s central bank has the authority to raise or lower interest rates as it pleases, which is often carefully analyzed by traders.
As previously explained, currencies are always traded in pairs, and a Forex asset is represented by the relative strength of two chosen currencies. The major factors that hold the ability to affect the strength and value of a chosen currency were outlined as well. If you wish to learn more regarding currency trading, or in case you got a feel for trading the foreign exchange markets, visit Banc De Binary and learn more.