Currency prices are driven primarily by interest rate differentials between countries, inflation trends, and central-bank policy decisions — because these determine how attractive it is to hold a currency relative to others. For traders in the Caucasus and Central Asia, oil prices carry an extra layer of relevance: both the Kazakhstani tenge and Azerbaijani manat have historically moved with oil, because Kazakhstan and Azerbaijan are major oil-exporting economies.
How do interest rates move currency prices?
Interest rates are the primary driver of currency value in most market conditions. When a central bank raises its policy rate, it increases the return on assets denominated in that currency — government bonds, bank deposits and money-market instruments all become more attractive. This draws investment inflows from abroad, which means investors must buy the local currency to purchase those assets. More demand for the currency pushes its exchange rate up relative to other currencies. When a central bank cuts rates, the reverse happens: returns fall, capital flows out, and the currency tends to weaken.
The relevant mechanism for forex traders is the interest rate differential — the gap between two countries' rates rather than the absolute level of either. A currency pair like EUR/USD moves partly on whether the gap between the European Central Bank's rate and the US Federal Reserve's rate is widening or narrowing, and whether the market anticipates that gap changing in future. Central-bank meeting dates, monetary-policy statements and rate-decision announcements are the highest-impact scheduled events in the forex calendar. The Bank for International Settlements has noted that interest-rate differentials are among the most researched and influential drivers of exchange-rate movements at medium-term horizons.
What role does inflation play in currency movements?
Inflation erodes purchasing power: if one country's prices are rising faster than another's, each unit of its currency buys less over time. All else equal, persistent high inflation tends to weaken a currency because the real value of what the currency can buy declines. However, the relationship between inflation and currency strength is indirect: what matters to the foreign-exchange market is what the central bank will do in response to inflation, not inflation itself. When inflation rises, markets anticipate rate hikes; anticipated rate hikes strengthen the currency before they happen. When inflation falls below target, markets anticipate cuts, weakening the currency in advance.
Inflation data releases — the Consumer Price Index (CPI), Producer Price Index (PPI) and Personal Consumption Expenditures (PCE) in the US, along with equivalent data from the eurozone, UK and Australia — are among the highest-impact scheduled releases in the forex economic calendar. Traders in the Caucasus and Central Asia using EUR/USD, GBP/USD or AUD/USD pairs as their primary instruments should know when these releases land, because the five minutes around a CPI print can move prices by tens of pips in a liquid pair.
What is central-bank policy and how does it move markets?
Central banks — the US Federal Reserve, European Central Bank, Bank of England, Reserve Bank of Australia, Bank of Japan and others — set short-term interest rates and communicate forward guidance about the trajectory of rates. The forex market prices in expected future rates, not just current rates, so the market often moves more on what the central bank signals about the future than on what it actually does today. A rate hike that was fully expected by the market may cause little movement; an unexpected change in tone or an upward revision to the rate path can move currency pairs significantly.
The tools central banks use beyond rate decisions include quantitative easing (buying assets to inject money into the economy, which tends to weaken the currency) and quantitative tightening (selling assets to reduce money supply, which tends to strengthen the currency). Forward guidance — public statements about future policy — is itself a market-moving tool. The practical implication for a retail trader: central-bank meeting dates (Federal Open Market Committee, ECB Governing Council, Bank of England MPC) are the highest-risk events in the trading calendar. Positions held open through these events are exposed to sharp, rapid moves that can gap past stop-loss levels.
- Rate decisions: the core central-bank tool — higher rates attract capital inflows and strengthen currency.
- Forward guidance: central-bank communication about the future rate path — often moves markets more than the rate decision itself.
- Quantitative easing (QE): asset purchases that increase money supply — historically correlates with currency weakening.
- Quantitative tightening (QT): the reverse — reduces money supply, typically currency-strengthening.
- Federal Reserve (US): sets the federal funds rate — the world's most-watched policy rate because USD is the dominant reserve and trading currency.
- European Central Bank (ECB): sets rates for the eurozone — primary driver of EUR pairs.
- Bank of England (BoE): sets the Bank Rate — primary driver of GBP pairs.
- Reserve Bank of Australia (RBA): sets the cash rate — primary driver of AUD pairs.
Why do oil prices specifically matter for the tenge and manat?
The Kazakhstani tenge (KZT) and the Azerbaijani manat (AZN) are the currencies of major oil-exporting economies. Kazakhstan is one of the world's top fifteen oil producers; crude oil and related hydrocarbons account for a large share of its export revenues and government budget. Azerbaijan's economy is similarly anchored in oil and gas exports from the Caspian basin, channelled through the Baku-Tbilisi-Ceyhan pipeline. When global oil prices rise, the export revenues of both countries increase, the governments' fiscal positions improve, and inflows of foreign currency support the local currency. When oil prices fall sharply — as they did in 2014–16 and again in 2020 — the tenge and manat come under depreciation pressure.
The tenge was devalued significantly in 2014 and allowed to float more freely from 2015; its exchange rate against the US dollar reflects oil-market conditions more directly than many peer currencies in developed markets. The manat was also devalued in 2015 and has since been managed within a tighter band. A resident trader who holds savings or income in tenge or manat and trades forex accounts denominated in USD or EUR is therefore exposed to two layers of currency risk: the moves in the pair being traded, and the manat or tenge's own relationship with oil prices and the US dollar. This does not create a trading recommendation — it is the economic context that makes the region's currency reality different from a trader based in a euro or dollar economy.
What other factors influence currency prices?
Beyond interest rates, inflation and oil, currency prices respond to a range of other factors. GDP growth data indicates whether an economy is expanding or contracting; stronger growth typically attracts investment and supports the currency. Trade balance figures — whether a country exports more than it imports (surplus) or less (deficit) — affect the demand for its currency through import/export transactions. Employment data, especially the US Non-Farm Payrolls (NFP) release, is a market-moving event because it influences the Fed's rate outlook. Geopolitical events — elections, conflicts, sanctions — can cause sharp, rapid currency moves that are difficult to anticipate.
Market sentiment and risk appetite also play a role. In periods of global risk aversion, investors tend to move into perceived 'safe haven' currencies — historically the US dollar, Swiss franc and Japanese yen — at the expense of higher-yielding or emerging-market currencies. For traders in the Caucasus and Central Asia, this dynamic can affect the lari (GEL), tenge (KZT) and manat (AZN) even when nothing domestically has changed: a global risk-off event can weaken regional currencies through broad capital flows rather than any country-specific factor. Understanding that external drivers can move regional currencies independently of local conditions is part of the honest picture of what forex traders in this cluster face.
- GDP growth: stronger growth attracts investment and tends to support the currency.
- Trade balance: a surplus (more exports than imports) supports demand for the currency.
- Non-Farm Payrolls (NFP): the US monthly jobs report — one of the highest-impact scheduled releases for USD pairs.
- Geopolitical events: elections, conflicts and sanctions can cause rapid, unpredictable currency moves.
- Risk sentiment: in risk-off periods, investors favour USD, CHF, JPY — at the expense of regional and emerging-market currencies.
- Commodity prices: for oil-exporting economies, crude oil price is a significant driver of the national currency.
Frequently asked questions
What is the biggest driver of currency prices?
Interest rate differentials between countries — the gap between what an investor can earn holding assets in one currency versus another — are among the most researched and influential drivers of exchange rates at medium-term horizons. Central-bank policy decisions and forward guidance about future rate paths move currency pairs significantly because the market prices in expected future rates, not just current ones.
Why does inflation matter for forex?
Inflation affects forex indirectly through what it signals about central-bank policy. Rising inflation typically leads markets to anticipate interest rate hikes, which strengthen the currency before the hike happens. Falling inflation below target leads to expectations of cuts, weakening the currency in advance. The forex market is pricing the trajectory of rates, not the inflation number itself.
Why do the Kazakhstani tenge and Azerbaijani manat move with oil prices?
Kazakhstan and Azerbaijan are major oil-exporting economies; oil and gas account for a large share of their export revenues and government budgets. When global oil prices rise, inflows of foreign currency support the tenge and manat. When oil prices fall sharply, the currencies come under depreciation pressure. Both currencies have experienced significant devaluations in periods of prolonged low oil prices.
What is the risk of holding positions open during central-bank announcements?
Central-bank rate decisions and policy statements can move currency pairs by tens or hundreds of pips in minutes. In fast-moving conditions, prices can gap past stop-loss levels, causing execution beyond the set price (slippage). Holding open positions through central-bank meetings (FOMC, ECB, Bank of England) exposes a trade to sharp, rapid moves that are difficult to manage in real time.
Do Georgian lari prices follow the same drivers?
The Georgian lari (GEL) is affected by general macroeconomic drivers — interest rate policy from the National Bank of Georgia (NBG), inflation, and Georgia's trade balance and remittance inflows. Georgia is not a major commodity exporter in the way Kazakhstan and Azerbaijan are, so oil prices affect the lari mainly through regional trade flows and investor sentiment toward the wider Caucasus rather than directly through export revenues.
Sources & further reading
CaspianFX is an independent editorial desk for resident traders in Georgia, Kazakhstan and Azerbaijan — markets where no strong local retail forex regime exists and offshore licensing is the practical reality. We verify every licence against the issuing authority's register, state candidly what that offshore regulation does and does not protect, and cover the funding and withdrawal routes that actually work for lari, tenge and manat. No payment is accepted for coverage.