Should Forex Traders Care about the Interest Rates? Yes.
Typically, higher interest rates increase a country’s currency value relative to countries that offer lower interest rates. The interest rate of a currency is arguably the most significant factor that determines the currency’s perceived value.
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Interest rate changes influence the forex market significantly. The changes can usually be made by one of the eight global central banks. The changes make immediate impacts on the market traders and hence understanding how to react as well as predict these moves will be among the first steps to making higher profits.
Basics of Interest Rates
For day traders, interest rates in the currency market are very crucial because, with a higher rate of return, more interest is accrued on the currency invested, which translates into a higher profit. However, market fluctuation is the only risk and can drastically hinder interest-bearing rewards.
How to Calculate the Rates
Usually, the central banks hike rates to control inflation as well as cut the rates in an effort to encourage lending and let the money into the country’s economy. Sometimes you can tell whatever the bank can decide by simply examining most relevant indicators such as employment levels, consumer price index (CPI), subprime market, consumer spending, and the housing market.
The relative strength, as well as weakness of those indicators, merely provides an excellent summary of the economic power. As the indicators improve, also the economy will perform well, and the rates will be raised or be kept the same if the improvement is of a small magnitude.
Besides, it’s possible to forecast a rate decision by merely analyzing forecasts and watching the significant announcements.
Major announcements when positive can be followed widely by traders who anticipate the Federal Reserve to raise interest rates, and hence have a short-term rally.
Analyzing predictions is also a way of predicting the interest rate decisions, and because they are anticipated, banks, brokerages, as well as professional traders, do have a consensus estimate.
Surprise Rate Sometimes Occurs
Traders can do the ultimate research, but sometimes central banks may have a surprise rate cut or hike. Therefore, whenever such scenarios happen, a trader has to be aware and understand the direction to follow.
In times of a hike, the currency appreciates meaning trades can buy, and when there’s a cut, traders probably sell then buy those currencies with high-interest rates.
After determining the market movement, it’s significant to act faster as speed is crucial when a surprise hits, and by so doing, maximum profits can be attained. Also, it’s good to watch for the volatile trend reversal.
One thing for sure, the currency doesn’t matter or does the direction matter, but with an interest rate cut or rate, the market is volatile – research is always crucial before any trade.
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Conclusion
When banks determine their monetary policy, forex rates also move, and when they move, traders get the opportunity to make maximum profits. Therefore, it’s a no brainer for traders to analyze the central banks’ actions and follow the news releases. Reacting to the surprise rate moves with speed will only improve the trader’s chances of high profits.
