How forex prices move

Forex prices move because of supply and demand: when more people want to buy a currency than sell it, its price rises against other currencies. Interest rates, economic data, news and overall market mood all shift that balance.

Supply and demand

A currency pair is a tug of war between two currencies. If demand for euros rises relative to demand for dollars, EUR/USD goes up. If investors rush into dollars, EUR/USD goes down. Every factor below matters because it changes how many people want to hold each currency.

Interest rates

Interest rates are one of the most powerful drivers. Higher rates can make a currency more attractive, because cash and bonds held in that currency earn more. When a central bank raises rates, or signals that it might, its currency often strengthens. Rate cuts can have the opposite effect. Markets react to expectations, so prices may move well before an actual decision.

Economic data

Regular reports give clues about a country's economic health, for example:

• Inflation - how quickly prices are rising, which influences interest rate decisions.
• Employment - such as the US non-farm payrolls report.
• GDP - the total output of an economy.

When figures come in better or worse than expected, the currency can move sharply within seconds.

News and sentiment

Elections, geopolitical events and unexpected shocks can move markets too. In uncertain times, traders often move money into currencies seen as safe havens, such as the US dollar, Japanese yen or Swiss franc. When confidence is high, they may favour currencies linked to growth and commodities, such as the Australian dollar.

Key takeaways

• Exchange rates reflect supply and demand between two currencies.
• Interest rates and expectations about them are a major driver.
• Economic data surprises can trigger fast moves.
• News and risk sentiment push money towards or away from safe-haven currencies.