To determine the direction of a particular country’s economy, traders use a variety of data, including gross domestic product, employment, growth, import, export, depth and other factors, which can be collectively referred to as fundamentals.

Supply and Demand 

Like any other financial market, the Foreign Exchange market is affected by changes in supply and demand. For instance, when there is a greater demand for dollars, dollar increases its value in the market.

Interest Rates 

The interest rate that the central bank of a particular country charges is an influential factor for the value of a given currency.

For instance, if the Federal Reserve of the United States raises interest rates, then the value of the US dollar will go up, causing the EUR/USD to drop.

If the European Central Bank (the Fed’s counterpart in the European Union) raise their interest rates, the value of the Euro will go up, causing the EUR/USD to rise.

Currency Pairs 

In the Foreign Exchange market, currencies are traded in pairs. One currency pair either rises or drops in comparison to the other. Each currency has a 3-letter abbreviation and the first currency in the pair is the base currency.

The price at any given time shows how much of the base currency is needed to exchange for the secondary currency. For instance, if the Euro rises in value then the EUR/USD price will also rise, as more US dollars will be needed to buy each Euro.

Next: Basic Trading Terms