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As in all free markets, currency pricing is governed by the forces of supply and demand. Due to the huge size and global span of the forex market, the supply and demand factors are constantly changing. Therefore the pricing of each currency is constantly changing in respect to another. The major elements affecting supply and demand can be classified into three categories: economic factors, market psychology and political factors.
Economic Factors: These include economic variables such as growth, debt and inflation plus economic policies set by government agencies and central banks such fiscal and monetary policy.
Market Psychology (Behavioral Economics): Market prices and allocation of resources are highly affected by human biases, emotions and psychology. This behavior pattern is not restricted at the individual level but is widespread in the masses in general. Sometimes the economic and political factors lead one to expect certain behavior in the market, but when trading it is safer to invest with what is actually occurring to the price structure, rather than what one thinks should be. This is why technical analysis is so important.
Political Factors:Internal, regional or international political conditions can reflect on a country's currency and sometimes its neighbors and trading partners currencies as well.
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