In the Forex market, as in the fundamental law of Economics is the pricing of currencies occurs due to the ratio of supply and demand. If to speak simple human language the value of the ruble or the Japanese yen relative to other currencies depends on the quantity and the volume of trade transactions and amount of money in the economy of these countries.
Well-known economist and supporter of the microeconomic approach theory of Milton Friedman began one of the first to say that demand creates supply. This law began to be used back in the fifties of the last century, its relevance has remained to the present day. If we talk about the Forex market, it is worth noting that high volatility is observed only in those countries where the exchange rate is not regulated by the Central Bank.
There are only a few of the factors that generate demand in the foreign exchange market:
- The value of a currency depends on the strength of the economy.
- The probability is high the profitability of financial contributions.
A stable and strong economy is a guarantor of stability, since these factors are associated with low volatility and high growth. If investors believe that their money will not be wasted, they start to invest their assets in this state. Most investors resort to purchase of traditional assets such as stocks, bonds, indexes, promising new projects, progressive business and more, thereby increasing demand for the national currency.
The growth of the currency value is due to the fact that all financial transactions are made in local money. So in new York traded in American dollars, virtually any in Moscow, and in the London pounds. After all, in order to acquire an asset from a particular country, the investor must convert its currency into national.
Progress or regress economic indicators can be tracked through GDP. If after analyzing the historical data, the investor saw an economic upturn, the country is favorable for investment. The more investors - the higher the value of the currency. Gross domestic product consists of many complementary components, through which you can learn about the General situation, as it includes information on consumer demand, the real estate market, manufacturing and even agriculture.
The analysis of each component allows to predict the future value of the currency of each state. And the higher the GDP, the stronger the currency.