When you run Fiddler, it checks system network settings and if it detects the settings haven't yet been modified, it sets the Proxy server address setting to point to itself
The proxy server address on which the Fiddler is listening is usually 127.0.0.1:8888 or localhost:8888
This way Fiddler instructs the applications to use Fiddler as a proxy server
Because of this setting all applications (except those that ignore proxy server setting) start sending their HTTP requests to Fiddler first, which will then forward the requets to the target servers. The target servers will return data to Fiddler, which will return data to the application that originally sent the request. This way Fiddler is capturing the traffic as a man-in-the-middle.