However, according to Iain Giffen, consulting trader coach for Knowledge to Action, a leading Forex training, development and education organisation, because of the variety of factors, it is difficult for retail traders to extract trends from an official forecast.
"An exchange rate represents the consensus in the market with regard to the respective risks and potential rewards perceived between economies. When the rate moves, it indicates that a net flow of capital is taking place in one direction because the previous consensus has fallen away."
Giffen says that this occurs when the market changes its perception of the perceived risks and potential rewards available in the respective economies.
"These events cause imbalances in market perception and are likely to lead to a flow of capital between economies, which in turn affect the exchange rate until a new consensus is found."
When describing the mechanics of this process, he says the price will change if there are more buyers in the market than there are sellers, or vice versa. "Buyers of any commodity will naturally gravitate to the seller who has the best price, but when the seller runs out of "stock" then remaining buyers have to go to the next cheapest price on offer. When they do, the price registered by the market goes up to the new price. The opposite happens when there are more sellers than buyers, or rather, more supply than demand."
He says that the ideal currency pairs to trade with are those where the market has not yet found a new consensus. "It is the perceived imbalances between economies which create numerous trading opportunities, as it indicates that the currency pairs will likely be trending. This is at least true for trending strategies.
"There are a myriad of factors that interact with each other, which results in currency price values constantly fluctuating. Currency traders need to be highly risk conscious as high volatility means that the price of a currency can change suddenly and dramatically.
"Without proper education the risk of losing a significant amount of money is high. A properly constructed and disciplined approach to the market is an absolute requirement for anyone to be consistently profitable without risking their capital, rather than simply guessing where the market will go next," he concludes.
