Two types  of analysis  are used for market  movements forecasting: fundamental,  and
technical (the chart study of past behavior of currencies prices).

 The fundamental one focuses
on theoretical models of exchange rate determination and on major economic factors and
their likelihood of affecting foreign exchange rates.
 

 
Purchasing power parity  states that the price of a good in one country should equal the price of
the same good in another country, exchanged at the current rate—the law of one price. There are
two versions of the purchasing power parity theory:

the absolute version and the relative version.
Under the absolute version, the exchange rate simply equals the ratio of the two countries' general
price levels, which is the weighted average of  all goods produced in a country. However,  this
version works only if it is possible to find two  countries, which produce or consume the same
goods. Moreover, the absolute version assumes that transportation costs and trade barriers are
insignificant. In reality, transportation costs are significant and dissimilar around the world. Trade
barriers are still alive and well, sometimes obvious and sometimes hidden, and they influence
costs and goods distribution. Finally, this version disregards the importance of brand names. For
example, cars are chosen not only based on the best price for the same type of car, but also on the
basis of the name ("You are what you drive").

 
Under the PPP relative version, the percentage  change in the exchange rate from  a given base
period must equal the difference between the percentage change in the domestic price level and
the percentage change in the foreign price level.

 The relative version of the PPP is also not free of
problems: it is difficult or arbitrary to define the base period, trade restrictions remain a real and
thorny issue, just as with the absolute version, different price index weighting and the inclusion of
different products in the indexes make the comparison difficult and in the long term, countries'
internal price ratios may change, causing the exchange rate to move away from the relative PPP.
In conclusion, the spot exchange rate  moves  independently of relative domestic and foreign
prices. In the short run, the exchange rate is influenced by financial and not by commodity market
conditions.