Economic cycles significantly influence currency trends as they reflect the overall health and performance of a country's economy. During the expansion phase of an economic cycle, characterized by robust growth, low unemployment, and increased consumer spending, a country's currency tends to strengthen. This strength is driven by positive investor sentiment and confidence in the economic outlook. Conversely, during a contraction or recession, where economic indicators weaken, currencies often depreciate due to heightened uncertainty and reduced investor confidence.

Central banks play a pivotal role in managing economic cycles by implementing monetary policies such as interest rate adjustments. Higher interest rates during economic expansion attract foreign capital seeking better returns, strengthening the currency. Conversely, lower rates during economic downturns can lead to currency depreciation. Traders closely monitor economic indicators and central bank actions to anticipate currency trends and make informed trading decisions in response to changing economic cycles.