INTEREST RATES & FOREX WHY DO INTEREST RATES MATTER IN FOREX TRADING?
INTRODUCTION ď ľ
Interest rates keep the forex world turning. One of the first things you learn as you enter the forex market is that interest rates indeed rule the global market. This is because the interest rate of currencies is one of the biggest factors when it comes to determining perceived value.
INTEREST RATE BASICS ď ľ
So, why are interest rates charged in the first place? In a nutshell, this is because when an individual or a business borrows from a certain lender, that lender will then have to sacrifice assets that could have been used for income generating activities or subsidized. In order to make up for that deficit, they then charge an interest rate which will be computed based on the principal of the total amount that one will borrow.
FOREX AND INTEREST RATES
The forex market relies on currencies, and currencies rely on interest rates. Interest rates are what dictate the in and out of global capital in a country.
Essentially, interest rates are what investors take note of to help them with decision-making and to gauge whether it is worth investing in a certain country or not.
The higher a country’s interest rate is, the more likely it is for their currency to get stronger. Alternatively, currencies that are plagued by low-interest rates will likely see itself weaken in the long run.
INTEREST RATES AND FOREX TRADING
The way traders manage to make the right calls in forex trading is through several economic indicators. The two best and most important economic indicators are the Consumer Price Index or CPI, along with the Producer Price Index or PPI.
The Consumer Price Index is regarded as the ultimate benchmark for inflation, especially in the economy of the United States. It is published monthly and is carefully monitored by experienced forex traders. These usually consist of transportation, restaurants, electricity, among many others.
Interest rates are volatile and always changing, which is why it is a forex trader's duty to keep their finger on the pulse at all times. With the right analysis of interest rates comes good trades!
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