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Interest rate’s influence in the forex market
Written by: PaxForex analytics dept - Wednesday, 18 February 2015 0 comments
While currency prices are what the market is all about, interest rates have a direct effect on those prices. Therefore to be able to understand the current foreign exchange market you have to understand the current conditions of each individual interest rate. While economic and political conditions are also among the things that greatly affect the forex market there is nothing that affects it more than interest rates.
When one country's interest rate rises their currency is seen as being stronger than other currencies. This happens because investors seek more of that currency to profit more. Otherwise, it is seen as a good thing when interest rates rise and a bad thing when they fall. When the interest rates raise investors will want to capitalize high returns and you will see money flowing into the country. Being aware of these things is part of making logical and rational decisions of trading.
Interest rates can be simply defined as the amount of money a borrower must pay to a lender in order to hold their money. In a simple representation of the foreign exchange market the lender is an investor holding cash or assets and the borrower is a bank inside a particular country. The lender (investor)
provides money to the borrower (the bank) and after a specific time period will receive interest in conjunction with the original sum which was put in.
Interest rate has a very strong impact on a country’s currency exchange. When the interest rate of a country raises the demand of that country’s currency goes up and its value gets appreciated and vice versa. When the interest rates raise investors will want to capitalize high returns and you will see money flowing into the country. When one country’s interest rates rise their currency is seen as being stronger than other currencies. This happens because investors seek more of that currency to profit more.
As a forex trader it is good to look at the full picture. How is the country doing economically? Why are they raising or lowering interest rates? Most important you need to know about the country that you're pairing the high interest currency against. This is all a game of relation. Sometimes it's one of the currencies in the pair that is causing movement and sometimes it's both, so it's always good to take the full picture into account.