Government budget deficits or surpluses – The market usually reacts negatively to widening government budget deficits and positively to narrowing budget deficits. The impact is reflected in the value of a country’s currency.

Balance of trade levels and trends – The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country’s currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation’s economy. For example, trade deficit may have a negative impact on a nation’s currency.

Inflation levels and trends – Typically a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising. This is because inflation erodes purchasing power, thus demand for that particular currency. However, a currency may sometimes strengthen when inflation rises because of expectations that the central bank will raise short-term interest rates to combat rising inflation.

Economic growth and health – Reports such as GDP, employment levels, retail sales, capacity utilization and others, detail the levels of a country’s economic growth and health. Generally, the more healthy and robust a country’s economy, the better its currency will perform, and the more demand for it there will be.

Productivity of an economy – Increasing productivity in an economy should positively influence the value of its currency. Its effects are more prominent if the increase is in the traded sector.
Internal, regional, and international political conditions and events can have a profound effect on currency markets.

Watch Out! Currency Traders post from Forex Trading Blog

EUR/USD has dropped back to mid 1.32 region at the start of the European session. With decision on Portugal still under consideration, European stocks continued to be sluggish. The markets tend to feel a bailout will be necessary.

Ireland’s EUR 85B loan and Portuguese bailout has left visible holes in the European economy. While rest of Europe tries to manage problem, the bond markets responded; with the Spanish-German 10yr bond spread rising 28 basis points to a high of 295. The EUR is continuing on a strong bearish trend

Bailouts In Europe Weaken EUR post from Forex Trading Blog

A strengthening Chinese economy will increase trade volumes with key partners (especially Australia and Brazil). The AUD is likely to strengthen further against the USD over time, especially with the Australian interest rate being where it is.

Chinese Economy Flexing Its Muscles post from Forex Trading Blog