• Supply and Demand
• Factors that change a Currency Price
• Example of Supply and Demand in the Forex
• Example from our daily life
• No one can control the Market

Supply and Demand

Each financial market in the world is built around the same logic, according to which both supply and demand determine the final price of each offered asset.

In economics, supply is the amount of a product which is available to customers while demand is the quantity of a good that consumers are willing and able to purchase at various prices during a given period.

Together they establish an economic model of price determination in a market.

It postulates that, holding all else equal, in a competitive market, the unit price for a particular good, or other traded item such as labor or liquid financial assets, will vary until it settles at a point where the quantity demanded (at the current price) will equal the quantity supplied (at the current price), resulting in an economic equilibrium for price and quantity transacted.

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Factors that change a Currency Price

All foreign exchange transactions are made Over-the-Counter.

There is always a counter party for any orders and “Supply” and “Demand” for all transactions.

As the basic rule of economics, if the number of “Demand” is larger than “Supply”, then the price goes up and vice versa.

You can say that more popular currencies are more expensive and its popularity depends on many aspects of the world.

Currency prices (exchange rates) are affected by a variety of economic and political conditions, most importantly interest rates, inflation, and political stability.

Moreover, governments sometimes participate in the Forex market to influence the value of their currencies, either by flooding the market with their domestic currency in an attempt to lower price, or conversely buying in order to raise the price.

This is known as Central Bank intervention.

All of the above can cause high volatility and price movement in Forex markets.

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Example of Supply and Demand in the Forex

Supply and Demand form the foundation of economics.

To understand the principle, we need to understand that the demand for the asset increases, or as its supply decreases, the asset price will rise and vice versa.

The following is an example from global trading market.

If a poor economic statistics announced in Britain, many traders will want to sell the British pound.

In another word, the supply of pounds will increase, resulting in the decrease in the currency’s value. The decrease in the value of British Pound.

Another example, if a crisis in an oil rich Arab counties announce, the price of oil will increase, due to fear of the supply of oil will decrease, as results of a sensitive developments in the region.

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Example from our daily life

The following is an example that illustrates this principle.

Let’s say a farmer has 5 regular customers.

Each day, a chickens lay 10 eggs.

One day, the chickens lay only 5 eggs, although the same number of customers wants to buy eggs.

There aren’t enough eggs for everyone, making each client willing to pay more for each egg, resulting in increase in the price egg.

In another word, supply decreased, less eggs, but the demand did not decrease, resulting in an increase of the value of the eggs.

This can also go the other way around.

Let’s say the chickens decided to lay 15 eggs. Now the supply has increased, but the demand remains the same.

In order to sell all the eggs, the seller must lower the price of the eggs.

In another word, the supply increased, causing the decrease in the value of the eggs.

Demand is also subject to change.

For example, one day the chickens laid as usual 10 eggs, but fewer customers come to buy them.

The seller may find them left at the end of the day. With unsold eggs, requiring them to lower the price.

In another word, the supply remains the same, but the demand decreases. So the value of the eggs also decreases.

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No one can control the Market

There are certain motives that drive the Forex market to certain directions though, as the scale of the market is so big, no one can completely control the market.

Even a Mega bank or a Government are not capable of doing that.

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