Before investors start foreign exchange trading, some basic understanding of foreign exchange fluctuations will definitely help avoid risks or increase profit opportunities. If you have a detailed understanding, you can get twice the result with half the effort in trading.

Of course, if investors want to conduct in-depth research, there are many factors, big and small, that affect the foreign exchange market. Here we simply summarize the three basic categories.

1. 1. Economic data

There are many currency pairs in the foreign exchange market, and the factors that affect the exchange rates of various countries are nothing more than the economic conditions. Every day, a lot of economic data from various countries are released, such as employment data, manufacturing PMI, GDP, trade accounts, etc. Investors can use them to track, measure, and compare the economic strength of various countries.

Simply put, the better a country's economic performance is, the easier it is for its currency to appreciate, and vice versa. Therefore, whether the economic data performs well or not can directly affect the foreign exchange trend, especially when the data is released.

2. 2. Fiscal policy and monetary policy

Fiscal policy refers to the policies implemented by a country's government, mainly involving fiscal expenditure budgets, which can have an impact on the overall economy, such as tax cuts, expansion of infrastructure, etc. The government's expansion of spending in order to achieve economic growth can bring appreciation space to the exchange rate on the one hand, but on the other hand it can also lead to a government fiscal deficit, which has an adverse impact on the exchange rate and even a crisis.

Monetary policy refers to the policies introduced by central banks of various countries. For example, the Federal Reserve's easing policy and interest rate adjustments fall under the category of monetary policy. Monetary policy adjusts the amount of money in circulation in the market to achieve the effect of influencing the exchange rate from the supply side.

As one of the main participants in the foreign exchange market, the central bank has a significant impact on the exchange rate trend. Therefore, whenever the central banks of various countries hold interest rate decisions, it often stirs up waves, amplifying volatility and trading opportunities.

3. 3. Geopolitics

Geopolitics refers to the impact of foreign and domestic affairs of various countries, including political stability, diplomatic conflicts, economic sanctions or natural disasters. For example, the presidential election is the most representative event. If the market expects a candidate to bring economic growth, trade stability and the like, then when he wins the election, it may bring appreciation space to the relevant currency.

The impact of geopolitics on the foreign exchange market can be long-term or short-term, and some of them are unexpected events, which test investors' ability to interpret information and trading experience. The better the investor's ability to interpret information, the more likely he or she will be able to seize the opportunity in the market.

These three factors that affect the foreign exchange market are generally macro, but the impact of these factors on the market is not absolute, and there may still be variables. Although in the final analysis, price rises and falls are all affected by demand and supply, but in general, they also largely include psychological expectations in the market. Therefore, traders still need to do their homework and actively cultivate trading experience and psychological qualities to achieve the effect of winning in a stable manner.