Forex is a versatile industry where every piece of information has some level of impact on the market prices. Though this is the largest liquid industry in the world, many decisions are taken based on the strategy which analyzes the price trends. This price movement is affected by numerous factors. A person cannot comprehend all this at one and we will only focus on one aspect at a time.
In this article, we are going to describe the impacts of interest rates on foreign exchange. This is going to be an intriguing read because people are only concerned about the world economy. This is common because most resources are focused on this concept. Yet interest rates can have consequences which we will be analyzing in this post.
What are interest rates?
Around the world, central banks control the rates of the loans banks are giving to customers. This is the money you pay when repaying the loans. Internationally these rates vary. In every country, the central authority decides this exchange rate. In the United States, for example, the Federal Reserve Bank decides the interest rate. This affects all the currency pairs because the Dollar is the most traded currency pair in Forex. By understanding the concept of using Dollar, investors can get an idea of how interest rates work in the market.
How does it affect Forex?
Now comes the part where we will be discussing this further. Going into mathematical and economic terms will sway away from the traders, therefore we will keep this session lively by using examples of daily lives. The effects can be described as two types. High and low interest rates.
High rates help to fight inflation. Sometimes banks deliberately impose higher interest rates on consumers to keep inflation under control. This may seem like a punishment but thinking of economic perspectives, inflation is bad for the economy. When the economy is controlled and thrived, currency pairs begin to show more resilient movements. This is reflected in the volatility and traders can expect more consistent patterns. For CFD traders, this is a good way to make money. Even if they need to borrow money from banks, consistency is expected to reward them generously in the future.
Now comes low-interest rates which are specifically designed for business proliferation. When the rate is low, businesses develop and startups begin. This slowly makes the economy stronger and the prices become more consistent. The goal of every nation is to achieve a self-resilient economy. Even with low interest rates, changes can be observed in the prices but never expect to get immediate results. We may say that in a sentence, but to become a stable economy, a country may need years.
Where to get the information?
Fortunately, the interest rates are set by governments and don’t change frequently. If you are trading successfully, no need to panic after going through this article. Keep using the strategy and analyze the market based on the formula. If major news is released, journals will publish them in financial columns. Read the financial developments to have an idea if any country is giving change a thought. Traders need to focus on their skills to make money. Inflation and economic news affect the volatility but an investor can find out the impact of those factors by going through the market developments.
Dealing with the economic events
As a professional trader, you must have the skills to deal with economic news events. If you fail to act professionally after the news release, you are bound to lose money. Smart traders usually make a big profit after the news event as they relate the economic data with the technical factors. So, try to develop a robust strategy that will focus on the technical and fundamental variables. And always monitor the high-impact news so that you can scale the trade systematically. If you find things hard, you may avoid taking any trades during the major news. It is better to stay on the sidelines rather than take trades without understanding the mechanisms of the market.