Currency rates depend on a lot of factors.
Currency exchange rates reflect the economy of one country as compared to another country. With foreign currency traded in pairs, the rate changes when the values of either of the currencies change.
A currency becomes more valuable when demand for it is greater than supply. Conversely, it becomes less valuable when demand decreases.
A country’s economic status has a big impact on demand for the currency. This includes factors like employment levels, business activity, and gross domestic product (GDP). If unemployment rises, the public as a whole spend less money on goods and services. Demand for the currency decreases, and foreign currency exchange rates fall. Worldwide interest rates also directly affect currency rates.
The most commonly traded currencies are known as the Majors – USD (US dollars), JPY (Japanese Yen), EUR (Euro), GBP (British pound sterling), CAD (Canadian dollars), AUD (Australian dollars) and CHF (Swiss francs). A quotation relating to foreign currency exchange rates represents the number of units of ‘term currency’ that can be bought in return for 1 unit of ‘base currency’.
Currency exchange quotations always give 2 prices for each currency pair – the Bid price (the rate at which a buyer is prepared to buy currency), and the Ask price (the price at which a seller is willing to sell the currency). The difference between the bid and ask prices is the dealing Spread. Normally, the spread is no more than 5 pips (eg 1.4694 – 1.4699).
Currency rates change all the time. When you are dealing in hundreds of thousands of pounds, a small percentage change makes a very big difference. A 1% change in the exchange rate for a sum of £100,000 makes a difference of £1000. Failing to find the best currency exchange rates could really mean the difference between profit and loss.
Studying currency conversion rates is only half the battle. You also need to decide how – and when – to trade.