Beginners Guide to the Foreign Exchange

IF New York is the city that never sleeps, the foreign exchange is the market that never stops for 40 winks. Well, ok, only on weekends.

Yes, from Monday morning right the way through to Friday evening, the foreign exchange market is very much open for business, simply because somewhere in the world it is the working day.

The origins of foreign exchange markets date way, way back to Biblical times but the modern marketplace that we see today really began in the 1970s when state control of foreign exchange ended and the relatively free market conditions that we see today started to evolve.

It is a decentralised market because it does not operate in one particular place like stock exchanges do. It is quite literally a global entity.

It is also by far the busiest market in the world – and is only getting busier. In April 2019 there was an average of $6.6 trillion per day being traded globally on the foreign exchange, up from $5.1 trillion per day three years earlier.

Foreign exchange – or ‘Forex’ as it is widely known – is simply the process of exchanging one currency for another. So if you do business abroad this can affect you as you change one currency for another.

The two currencies involved are known as currency pairs, with your one being the ‘base’ currency and the one you want called the ‘quote’ currency.

Exactly how much of the quote currency you will receive for your base currency is determined by the exchange rate at that particular time.

Timing can be crucial because the exchange rate is constantly changing. If you time your transaction right – i.e. when your base currency is strong – you can get more value for your money when purchasing goods or services from overseas.

But time it all wrong, and those deals suddenly become a bit more expensive.

On the flip side, if you are trying to sell your products overseas when the pound is strong, your products may seem expensive and that could well put off your buyers.

The exchange rate itself can be affected by several factors including inflation, consumer confidence, interest rates, government debt and economic growth in any given country.

If UK interest rates rise, it suddenly becomes more attractive to deposit money in the UK, which in turn sees the demand for Sterling rise. This then boosts the strength of the pound, which is good when buying products from abroad.

So it can be tricky, it can be very daunting for beginners, but this is where experts like SkylineFX can step in.

We can help you not only identify the best time to make your transactions, but also to get the very best value for money with savings of up to 5% compared to using your bank who may well hit you with poor exchange rates and unexpected fees.

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