According to experimental data, it is reported that the correlation between the fluctuations of the Forex market and interest rates is quite strong. Before we describe it further, let’s make clear first exactly how interest rates are related to Forex.
While trading in this largest currency exchange market, you will see that the values of currency pairs move up and down. What are the factors affecting this fluctuation? These factors include – GDPs, interest fees, inflation, unemployment condition, economic recession, and the performance of a state. All these factors will determine whether the price of the coin will increase or decrease.
Interest rate is the most important among these factors. The actual interest rate is like the nominal rate with less inflation. The trend in the FX platform follows the currency, which has the largest real interest fee, and every trader should be cautious of the interest rate of the central bank of a specific country. Here, we are going to cover the following –
- Interest rate (%) and its effect on currencies
- How traders can realize the tariffs of the central bank and their impact
What is the interest rate, and how does it affect the currencies?
When the investors discuss the tariffs, it means they are indicating the interest percentages of the central bank. This is a vital issue, and every Forex trader in Hong Kong has to deal with it. At least, they need to consider this to foresee the next flow. If a beginner notices that there is a change in the interest rate of a currency, he will have to understand that the graph will take the flow in favor of the coin. The central bank utilizes a monetary policy meeting, which is used to control the interest rates. The most common ones are –
- Open market operations, and
- Discount rate
The central banks have two major tasks to do – they have to control inflation and enhance the stability of the exchange fee. Those banks do it by altering the tariffs and handling the supplementation of the money. When inflation goes, the banks increase the tariff and get the inflation back to its previous level.
The entire economic cycle and the interest (%)
Let’s start from a point. The economy of a country either contracting or expanding. Let us assume that the economy is expanding. When it expands, everyone becomes better, and the consumers begin to earn more money, which ultimately leads to more expenses. It triggers inflation, which starts to rise gradually.
Therefore, it can be said that when the economy expands, inflation also expands. And those who are involved in trading stocks, know easily the economy affects the market. In Forex, the market is much more volatile than the stock market and major news events can change the trend very easily.
When the inflation crosses the target limit (2%) of central banks, they increase the interest rate. This increased tariff makes everything costlier, and consumers reduce spending. Due to this, the economy starts contracting. Now, deflation becomes an issue. As a consequence, the banks again cut off the tariff. Once again, it increases economic growth and expansion. This works as a cycle. Let’s represent it as a flowchart –
Economy expands → Inflation increases → Higher interest fees → Economy contracts → Lower interest fees → Economy expands again.
Predicting central bank tariffs and their impact on Forex
If you realize the cycle mentioned above, then you should definitely understand what to do for predicting the approaching direction. If an investor wants to foresee the future market, he should investigate the central banks. Search data which they are monitoring at that moment, and at the same, he can also analyze the economic performance or check the inflation rate of the state. Based on these data, a newbie can quickly understand what he needs to do to make a profit in the market.