Interest rates

Why are interest rates important for forex traders? MintGenie explains

A key factor influencing the foreign exchange (forex) market is interest rate changes made by major central banks such as the Federal Reserve of the United States, the Bank of England (BoE) and the European Central Bank ( ECB). Interest rate changes are made as part of their monetary policy in response to a number of economic factors including inflation and growth.

Changes in interest rates can affect currency exchange rates instantly and sometimes substantially. Since these changes tend to influence exchange rates, understanding them is key to making bigger gains in forex trading.

READ MORE: Forex Trading in India: All You Need to Know?

Impact of interest rate changes

When interest rates are increased, traders want to buy the currency and its exchange rate increases. On the other hand, when interest rates are reduced, traders want to offload the currency, causing its rate to drop. If thorough and timely research is done before the movement of interest rates, a trader can save himself, in most cases, from sudden changes in exchange rates.

Although interest rates can be anticipated with the help of good economic models, surprise statements from a major central bank sometimes leave the foreign exchange markets in turmoil. Forex traders know that despite doing incisive research or performing calculations on projected interest rates, central banks can still give a surprise rate cut or hike. When exchange rates move, traders can maximize their profits through market volatility.

It is therefore pertinent to know that the exchange rate of all major currencies is invariably influenced by announcements made by major central banks, including the Federal Reserve and the European Central Bank (ECB).

READ MORE: Forex Trading: What Is Currency Arbitrage and Is It Profitable?

But it is equally important to know that the announcements are a reflection of the main economic factors that prevailed in the economy at that time. Conventional wisdom dictates that keeping abreast of these macroeconomic factors is as important as the central bank announcements that summarize them.

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