What moves currency prices?

Forex pairs are constantly fluctuating in price, due to a wide range of factors. It's a key reason why foreign exchange is so popular among traders.

However, to understand forex you'll need to know precisely what might kickstart a new trend in your chosen markets. Here's a breakdown of the biggest drivers of forex volatility – starting with the biggest of them all, central banks.

Central banks and forex

As we covered in the Fundamental analysis course, central banks have a significant say over multiple financial markets. But they probably have some of the most direct impact on currencies.

Even if you're planning on a purely technical approach, it pays to be aware of what the central banks behind your chosen currencies are planning. To help get you started, here's what to watch out for if you're trading USD, EUR or JPY.

USD

The US dollar is the most-traded currency by some distance. It features in every single major pair, is used as the world's reserve currency and forms the backbone of financial markets.

In practice, this means that every popular FX pair is hugely influenced by the actions of the Federal Reserve. Most importantly, the Federal Open Market Committee, or FOMC, which meets eight times a year to set the base rate for the US.

As ever, the markets will look for any clue on the future direction of interest rates. Any sign that interest rates may rise in the US could see USD rise in value. Any indication that they'll fall, meanwhile, can cause USD to fall.

So watch for CPI figures from the US Bureau of Labor Statistics, and, of course, non-farm payrolls. Why? Because high employment is a primary goal of the Fed – and a sign of a growing economy. If employment is low, a fall in interest rates might be on the way. If employment is high, then the Fed might be able to raise interest rates.

Remember, though, that the USD going up or down will have a different impact on different pairs, depending on whether the dollar is the base or quote currency.

EUR

The second-most popular currency on the markets is the euro – chiefly because it forms one half of EUR/USD, which makes up an overwhelming majority of global forex trading. The euro also features in important minor pairs such as EUR/GBP and EUR/CHF.

Where the US has the Federal Reserve, the European Union has the European Central Bank. Here, the Governing Council meetings are the key ones to watch. They take place every six weeks and are used to decide the rates national central banks (NCBs) can use with commercial banks.

JPY

Central banks don't only affect currencies by setting interest rates, though. Sometimes, the value of a currency can inflict harm on an economy, which can lead to its central bank stepping in.

Japan's economy is dependent on exports, for example. Countries with high exports tend not to want their currency to gain too much value – take a look at the table below to see why.

If JPY is too strong against USD, then Japanese exporters make much less money. They might have to increase their prices, which could see overall sales fall. In this instance, the Bank of Japan might flood the market with JPY by releasing reserving cash. This supply glut should cause the yen to depreciate, meaning USD/JPY rises.

Taking advantage of intervention is particularly challenging because unlike interest rate changes, it isn't usually communicated to the masses until after it has occurred.

However, there may be clues that intervention is about to be implemented, particularly if a central bank repeatedly states that its currency is historically overvalued. However, the timing of it is difficult to gauge and is usually a surprise.

Other factors to watch out for

1. Government announcements

Governments are responsible for fiscal policy, which also has a major impact on currencies.

To fund a new infrastructure project, for example, the government will have to borrow money in the form of bonds to sell to investors.

Fiscal stimulus measures are agreed upon by governments, and sometimes a vote needs to take place to make the stimulus law. It pays to keep up to date with breaking news events to ensure you don't miss these crucial decisions.

2. Market sentiment

In their simplest forms, fear can turn a falling instrument into an all-out panic and greed can turn a rising market into a blind-buying spree.

The crisis in the Eurozone and, in particular, Greece, in the 2010s led to the extreme selling of the EUR currency as fear dominated mainstream thought. Soon after, though, greed kicked in and drove the currency to levels that were detrimental to employment and inflationary dynamics – the European Central Bank had to force devaluation through a variety of market mechanics.

While it may be easy to point out the effects of fear and greed on markets after they have acted upon them, choosing the moment when they flip in the present is difficult.

3. News

Not all news events are equal.

For instance, as a general rule, employment reports tend to move markets more than a manufacturing sales report, and a retail sales figure riles things up more than a monetary supply report.

The Economic Calendar is a great resource to help you determine which reports provide the most punch. While not all important news events move the needle when their number is called, they have the highest probability of doing so, and knowing when the markets will move can be one of the greatest advantages you have as a trader.

Finding events with the FOREX.com economic calendar

Follow these steps to set up the FOREX.com economic calendar to your requirements:

1. Head over to the economic calendar
2. Hit SHOW FILTERS. Here, you can filter events by country, category and volatility
3. Choose the countries that related to your chosen pairs, then hit APPLY FILTERS
4. Now, you'll only see events for your markets – the marker to the right tells you whether high, medium or low volatility is expected
5. You can also see any consensus on where data might land, in the Consensus column