The Role of Speculation in Currency Market Price Movements

One of the causes underlying the fluctuations in the foreign exchange markets is develop in the currency markets. Greed by its very nature implies the prediction of the future direction of the market and trading in such a way as will lead to a profit from such a prediction. Forex trading involves trading in currencies whereby investors and traders make a business out of the changes in value of these currencies. The purpose of this article is, therefore, to explore how speculation affects the currency market price.

Forex trading takes place in the Foreign Exchange or Commodity Market which is an OTC market, an unstructured market without any central trading hub. Due to this reason, it becomes a focus point for speculation as traders in currencies and investors deal from there. Due to the fact that the forex market is the largest and the most active market in the world with daily turnover of over a trillion dollars, it is quite volatile, which is the result of speculative activities.

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This means that speculation in the forex market tends to rely more on what happens around the world; things like; economic attributes, political events, and natural disasters. Such occurrences depend on a country’s currency, thus affecting the currency’s exchange rate. These aspects are watched keenly by the forex traders aiming at guessing how they would shape the forex market and, in extension, adjust their trading patterns.

Speculation can occur in various fashions including employing a directional approach, arbitrage trading and hedging. Directional trading entails using expectation on the movement of the prices of currencies in the trading process. On the other hand, arbitrage trading involves the buying and selling of securities in an attempt to profit out of what is considered an anomaly in the market. Foreign exchange risk management that involves the use of options by those who invest in an attempt to minimize loses through disastrous currency fluctuations is referred to as hedging. These forms of speculation help in determination of prices in the currency market.

Another important component that need to take into consideration in understanding of, the position of speculative activity in currencies’ market price fluctuation is leverage. It enables traders to trade with high volumes of capital as compared to the trader’s own funds. Leverage is often an excellent tool to let small capital result in large profits or large capital result in even larger losses in the forex trading business. It also means that speculation carries considerable influence over market currencies, due to the constant interaction with the market.

However, it important to stressed that conjecture is one of the factors that influences forex trading, albeit not the whole factor that determines currency markets’ prices. Moreover, official interference in the form of statements from the central banks and other government’s political actions can also contribute to changes in exchange rates. Also, market conditions like conflicts in specific regions and even economic downturns in the world affect the forex market price to change in manners that are inconceivable.

Finally, the function of speculation as a determinant of currency market prices cannot be overemphasized. Since forex traders and investors are able to take actions in advance based upon what they believe will happen in the near future, a dramatic swing of rates of the currency can be instigated. Nevertheless, it is appropriate to define other factors which include; the central bank intervention, the global events that may affect the currency exchange rates. Speculation plays a vital role in the practice of forex trading and bearing this in mind will be very important for anyone trying to learn more about the foreign exchange markets.