What moves currencies

A currency is a share in a country. Its price goes up when more people want to hold it than sell it, and five things decide that.

The five drivers

Interest ratesInflationGrowth & jobsRisk sentimentTrade & commodities

▲ Higher rates

▼ Lower rates

Higher interest rates attract foreign money seeking better returns, which must be converted into the currency first. Rate expectations are the single biggest driver of major currencies.

Tap a driver. Green arrows push the currency up, red arrows push it down.

1. Interest rates. Money flows to where it earns most. Higher rates, or the expectation of them, pull capital in. This is the big one.
2. Inflation. Mostly matters through rates: rising inflation means the central bank is likely to raise them.
3. Growth and jobs. A strong economy earns more, attracts investment and lets the central bank keep rates higher.
4. Risk sentiment. When the world is nervous, money runs to safe havens. When it is confident, it chases yield.
5. Trade and commodities. Exporters’ currencies follow the price of what they export.

Four of the five lead back to the same question: what will the central bank do next? Keep that in mind and most headlines become easy to classify.

Try it

What would you do?

A headline reads: 'Eurozone inflation unexpectedly rises to 3.4%, well above the 2% target.' Which way does this push the euro, and why?

Down: inflation is bad for a currencyUp: higher inflation makes ECB rate rises more likelyNo effect: inflation only affects consumers

Notice how the right answer came from asking what the central bank would do, not from whether the news sounded good or bad.

Quick check

1. Question 1 of 3

   Which single factor most consistently drives major currencies?

   AInterest-rate expectationsBThe size of the country's populationCThe stock market

Go deeper: Fundamental analysis in forex: what moves currencies