Most important factors in changing Foreign Exchange rates:
- Trade surplus or deficit between countries measured by the balance of payments
- Change of interest rates, such as an increase or decrease of the “prime lending rate”
- Quantitative easing, in particular a government buying up its own bonds to boost their prices.
- Intervening to support a currency, where the country wants to maintain a certain exchange rate with its trading partners
We want to create a simple model in which each of these scenarios triggers buying and selling of currencies in such a way that the buying pressure raises the relative value of one currency and depresses the other, and selling pressure has the reverse effect. This is ordinary supply and demand.