How Supply and Demand Move Currency Exchange Rates
Summary
The note addresses what causes exchange rates to fluctuate and asks how individual price ticks arise, using EUR/USD as an example. Its answer gives a high-level explanation: prices respond to imbalances in supply and demand. It points to political isolation and runaway inflation as forces that can weaken a currency, using the Russian ruble as an illustration.
The response does not describe the requested sequence of quote updates, bank or dealer order handling, or how Commitments of Traders data is compiled or relates to spot foreign exchange. It therefore offers a basic economic intuition rather than a technical account of tick formation. The example is qualitative, and the note provides no data or detailed mechanism for measuring the cited pressures.
Key ideas
- Exchange rates move as market supply and demand change.
- Political isolation and inflation can contribute to currency depreciation.
- The response gives broad economic intuition rather than a tick-by-tick account of quote formation.
- It does not explain how COT data is determined or how it relates to spot currency prices.
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Full text
# Answer by chjortlund (score 1) # What are the technical events that fluctuate quoted asset (e.g. forex) prices? How does it relate to the purchase of currency contracts? This is a generic question about the quotations of assets but for the sake of reducing ambiguity, let's consider the EUR/USD exchange rate. If the answer varies for other asset classes, please note the differences. While references to how the initial exchange rate is set will be appreciated, the question is specific to the constant fluctuations produced by any bank. The closest answer I have found, states: > The bank just facilitates transactions. If the last price (exchange rate) is 1.2 Dollars per Euro, and the bank gets more requests to buy USD for Euros than Euros for USD, it adjusts the rate downwards until the buying pressure is even. If the USD gets more expensive, at some point fewer people will want to buy it (or want to buy products from the US that cost USD). The bank maintains a spread (like buy for 1.19 and sell for 1.21) so it can take a profit. What is the series of technical events that produce these fluctuations, in as much granularity as possible? An example for 2-3 ticks should suffice. Further, how is it related to the COT data, if at all? How is COT data determined? ## Answer by chjortlund (score 1) https://quant.stackexchange.com/a/15826 Supply and demand... If you want an event that produce a change in the value of a currency, just look at the ruble. As Russia, gets more and more isolated and inflation spins out of control the ruble lose its value against other currencies.
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