The forex market like any other financial markets, is a place where people, companies or even governments exchange financial assets. In this case, the financial assets being exchanged are currencies. For example, if the EUR/USD is at 1.1, it means that 1 euro can be exchanged for 1.1 US dollars.
Despite the forex market’s similarity to other financial markets, it does have it’s own unique characteristics. The forex market happens on a global level and is massive in terms of volume and liquidity. Because of it’s global nature, there is no down time and it is available 24 hours a day, 7 days in the week. ( Although most brokers operate on a 5 days basis and are closed on weekends and major holidays )
Why Is There A Forex Market
The forex market is vital to the global economy as it facilitates transactions worldwide. For example:
- Governments participating in trade deals may need to hold currencies of their respective partners
- Businesses doing import may need to exchange their home currencies for the exporters’ home currencies
- Individuals investing in the equities of another country may need to do so in the foreign country’s currency
As you can see above, the scope of the forex market is massive. With so many participants and activities going on, liquidity is high compared to other financial markets where you may literally need to wait for a while for a buyer or seller.
Popularity Of The Forex Market
Due to the nature of the forex market, where it is readily available and accessible, it has become one of the most popular financial markets. As global economic trading continues to increase, the need to exchange currencies has risen too. In April 2019, trading in the forex market was reported to be $6.6 trillion per day. This happens across various electronic computer networks among traders, doing away with the need of a centralized exchange.
What Affects Forex Rates
At a fundamental level, forex prices are a product of expectation towards the currencies concerned. For example, a country that is doing well may attract increased demand for it’s currency. With that increased demand, bullish pressure may surface, causing the currency to rise in value versus other countries’ currencies. Similarly, a bleak outlook for a country may trigger a selloff of it’s currency, leading to bearish pressure.
The example described above usually takes place across a long period of time. Expectations about a currency may also change in a moment due to immediate sentiments that are often reactions to an event. For example, speculation of an interest rate hike may generate temporary interest in a currency that pushes it’s value higher, only to be undone when it turns out to be false.
The Bottom Line
The forex market is similar to any other financial market but it does has a number of unique characteristics. It is a global market and due to its massive level of participation, it offers a high level of liquidity. The pricing of the currency exchange rates are influenced by fundamental factors over a long period of time but sentiments may result in short term volatility.