Supply refers to the amount of an asset that is available while demand is the quantity of an asset that people are willing to buy.
As supply of an asset increases, its value declines. Conversely, as supply of an asset decreases, its value rises. As demand for an asset increases, its value rises. Conversely, as demand for an asset decreases, its value declines.
Since this principle applies to the currency market, plenty of traders look at supply and demand for a particular currency at a given point in time to figure out whether that currency’s value will rise or decline.
One way to gauge supply and demand is to picture a seesaw with all the fundamental factors affecting that currency. For example, when an economic report either increases demand or reduces supply for the US dollar, place that fundamental factor on the left side of the seesaw. When an economic event either decreases demand or increases supply for the US dollar, place that fundamental factor on the right side of the seesaw. If there are more factors on the left side, then the seesaw would tilt upwards and the US dollar’s value should rise. On the other hand, if there are more factors on the right side, then the seesaw would tilt downwards and the US dollar’s value should drop.
This way, traders are able to take note of all the recent fundamental factors that are affecting a particular currency. This is helpful in assessing whether that currency is performing relatively well.