Register now to be able to add articles to your reading list. How often have you heard the term interest rates? Thousands of times I bet, depending interest rates and forex how long you have been in this business.
Our team has mentioned it many times in our daily updates and weekly analysis and have several articles about the central banks, who affect these rates. An interest rate is basically the annual percentage that you have to pay back to the lender for the money you have borrowed. 100,000 mortgage to buy a house. But that’s not exactly what the forex jargon refers to when we mention interest rates.
They are calculated in the same way but, the interest rate in forex is the rate that the second-level banks would pay a central bank to use its money. The central banks lend money to the second-level banks and for this, they have to pay interest. This is the interest rate that we refer to in forex. Who controls the interest rates and why they move? However, there’s another interest rate in forex. Besides borrowing money, the second-level banks and other depository institutions place their extra cash at the central bank as the safest place to keep it.
For this, they receive interest in return. But, it doesn’t act as a solid body. The central banks are made up of several members, all of whom vote to hike or cut the interest rates at every official meeting. But it’s not that difficult to understand. The lower the interest rate, the less willing the second-level banks are to keep money deposited at the central bank, therefore, the more money in circulation. We know that money is a commodity just like any other, so the more goods around, the cheaper they become. 5 years making them negative, which means that if the second level banks keep the money deposited at the BOJ they will have to pay interest to the BOJ.
The large local and international banks obviously don’t want to pay 0. Yen deposited at the BOJ than throwing it away on the economy. USD when the FED hiked the interest rates from 0. ECB cut the financing interest rates from 0.
The Euro initially lost 200 pips which seemed to be the right reaction. Then it reversed and closed the day about 450 pips higher. USD turned into broad USD selling because the USD lost several hundred pips against all other pairs that day. So, if you see an interest rate decision on the calendar and want to trade it, evaluate all the factors.
As you can see, the interest rates really affect the forex market. Sometimes the effect is smaller because the market expects the hike or cut in the rates, and sometimes the move from a central bank comes as a surprise, which will have a bigger impact. Often, the price of the related currency goes in the same direction with the interest rates but not always, so you must be careful to read the price action and analyze many other factors. Immediate alerts to your email and mobile phone. Entry price level for every signal.