OPEN APP
Home / Money / Personal Finance /  Why are interest rates important for forex traders?

Why are interest rates important for forex traders?

A currency trader walks near the screens showing the Korea Composite Stock Price Index (KOSPI), right, and the foreign exchange rate at a foreign exchange dealing room in Seoul, South Korea, Wednesday, July 27, 2022. Asian stock markets followed Wall Street lower Wednesday as traders prepared for a possible sharp interest rate hike from the Federal Reserve to cool inflation. (AP Photo/Lee Jin-man) (AP)Premium
A currency trader walks near the screens showing the Korea Composite Stock Price Index (KOSPI), right, and the foreign exchange rate at a foreign exchange dealing room in Seoul, South Korea, Wednesday, July 27, 2022. Asian stock markets followed Wall Street lower Wednesday as traders prepared for a possible sharp interest rate hike from the Federal Reserve to cool inflation. (AP Photo/Lee Jin-man) (AP)

  • Tweaking with interest rates by the nation’s central bank casts a shadow on the currency’s exchange rate. Read further to know how this happens

Listen to this article

A key factor that influences the foreign exchange (forex) market is the interest rate changes made by major central banks such as the Federal Reserve of the United States, Bank of England (BoE), and the European Central Bank (ECB). The changes in interest rates are carried out as part of their monetary policy in response to a number of economic factors including inflation and growth.

The interest rate changes can sway the forex rates instantly, and at times — substantially. Since these changes tend to influence the currency exchange rates, it is vital to understand them to make higher gains in forex trading.

READ MORE: Forex Trading in India: All You Need to Know?

Impact of interest rate changes

When the interest rates are hiked, the forex traders want to buy the currency and its exchange rate rises. On the other hand, when the interest rates are cut, the traders want to offload the currency, which leads to a decline in its rate. If a thorough and timely research is done prior to the movement of interest rates, a trader can save themselves, in most cases, from sudden exchange rate changes.

Although interest rates can be anticipated with the aid of right economic models, the surprise statements by a big central bank, at times, leave the forex markets in a tizzy. The forex traders know that despite having done incisive research or number crunching on projected interest rates, central banks can still give a surprise rate cut or hike. When the currency rates move, traders can maximise their profits from volatility in the market.

So, it is pertinent to know that foreign exchange rate of all major currencies is invariably influenced by announcements made by major central banks including the Federal Reserve and European Central Bank (ECB).

READ MORE: Forex trading: What is currency arbitrage, and is it profitable?

But it is equally important to know that the announcements are the reflection of major economic factors prevailing in the economy during that time. The conventional wisdom demands that staying abreast of those macro factors is as important as the central bank announcements that encapsulate them.

Follow MintGenie for more such stories. 

 

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.

Recommended For You

×
Get alerts on WhatsApp
Set Preferences My ReadsWatchlistFeedbackRedeem a Gift CardLogout