The forex markets are best imagined as an intricate concoction of levers and pulleys, these implements representing the various influences that cause currencies to rise and fall. Depending upon the amount of pressure exerted on the different parts, the worth of combinations increase and decrease from day-to-day, with successful forex traders able to unravel the likely effects of such drivers before they come to pass.
These influences are numerous, including everything from political strife to conflict, and the most influential amongst them is interest rate changes. Implemented by the eight global central banks, these are a response to a variety of economic indicators, and attempt to combat and lessen the fallout from any one of them.
But just how do they affect the forex markets?
What Do Interest Rate Changes Mean for the Forex Markets?
For those reading this article, the assumption is that you are either a bona fide or an aspiring forex trader, practicing or ready to practice your art trading forex through a broker like FxPro. This means that you need to be able to read the markets, and in order to possess such a skill, you first have to know what drives them.
As we mentioned above, interest rates should be at the forefront of your analysis, for they possess the power to move the markets immediately and dramatically, irrespective of any other factors in play. Where such rate changes are unexpected, the fallout is especially extreme, and it is in this volatility that the greatest opportunities lie.
How Do Interest Rates Affect Returns?
Interest rate changes do not only have an abstract effect; more directly, they influence the interest that you accrue on your investments, so the higher they are, the greater your rate of return will be.
Yet few currency traders are overly concerned with this aspect of interest rates. They cannot influence them in their favour, and so they pay little attention to them. Instead, what they focus on is how they can use these fluctuations to their advantage, and this means learning to apprehend them, and the effect they will have.
How Can You Predict Likely Changes to Interest Rates?
In order to achieve the objective stated above, you have to learn which factors influence changes in currency rates. The list below is a great place to begin, and each of these economic indicators will play its part in moulding central bank decisions.
So, to commence, make sure that you study:
- the Consumer Price Index;
- consumer spending;
- employment levels;
- the subprime market;
- the housing market.
Where the performance of these is poor, interest rates are likely to be lowered; where they are healthier, the assumption should be that they will either increase or remain the same.
Utilise this knowledge today to make the most of your forex trading opportunities.