Forex or FX is short for “foreign exchange”. It refers to the global market where currencies are bought and sold, or simultaneously changing one currency for another.

For example, when you go on a holiday and swap your currency for the local currency

where you are visiting, that’s a forex transaction.

Of course, the forex market is much more than just holiday money. It's the largest and most liquid financial market in the world, with trillions of dollars flowing through every day.

All fx trades involve two currencies, which together are known as pairs. If you decide to trade FX, your objective is to anticipate which one of the pair is going to outperform the other. 

Think of each currency pair as a relationship. They have a history, and even their own

personality traits. There are periods of calm where both are experiencing stable and

predictable growth, but as with every relationship, there can also be turbulent times, where government policy fails, sanctions are imposed or even military conflict.

In today’s highly interconnected and globalised economy,
numerous factors move values of a country’s currency. Some key areas to consider are:

Central Bank Decisions (E.g. Bank of England, European Central Bank, Federal Reserve):

Central banks are responsible for setting their country's interest rate. FX traders generally focus on getting the best return they can from interest rates available between countries. This is called the interest rate differential.

For example, in early 2024 America was paying interest of 5.25% on each dollar, whereas Japan was only paying 0.25% for each Yen. The 5% difference between the two is the interest rate differential, or how much more investors will receive each year from holding USdollars rather than yen. So when trading forex, it’s vital to monitor central bank releases related to the currency pairs you are trading.

Employment numbers, growth in its GDP, inflation and consumer sentiment can all influence a currency pair. Monitoring the economic calendar will help keep you up to date with major economic data releases and help explain movements in currency pairs.

Wars, political crises, global unrest, and other related events can also impact the foreign exchange markets. Some currencies such as the Swiss Franc tend to do well in times of uncertainty as they are known to be safe havens. Others such as the Aussie Dollar or South African Rand may lose value due to their heavy reliance on selling commodities, as demand could be affected by global unrest.