Every month, certain currency pairs have interest rate decisions which are made available to the public at certain time and dates. The biggest influence that drives the foreign-exchange market is interest rate changes made by any of the eight global central banks. Interest rate announcements are some of the big currency market-moving news every month and the only way to be aware of when this forex news come out is by having a forex economic calendar.
These changes are an indirect response to other economic indicators made throughout the month, and they possess the power to move the market immediately and with full force. Because surprise rate changes often make the biggest impact on traders, understanding how to predict and react to these volatile moves can lead to quicker responses and higher profit levels. Decisions on lowering the rate, increasing it, or maintaining the status quo are linked to the country’s economic health. Whether anticipated or a surprise announcement, the impact is palpable, which makes it important for forex traders to have some plan/strategy up their sleeves to make the most of opportunities.
The interest rate decision is not the most important part of the central bank's communication process. Forty-five minutes after the interest rate is communicated, the press conference starts. This press conference is even more important for the market than the actual interest rate level because traders have a strong tendency to trade future expectations. If the central bank raised the interest rate it is bullish for the currency, but if, forty-five minutes later signals that the rate hike was one and done, the currency will be sold eventually.
Trading with regards to interest rate impacts, however, is never as straightforward as the above simplistic discussion. As with any other factor, anticipation, expectation and the facts also influence how the trading community reacts to change. If the rumor mill starts to believe a fall in rates is imminent, the currency may fall well ahead of the official announcement, and even after the announcement, it might actually rise in value.
Following the activities of central bankers and the news related to what they might be considering should be top of mind for all currency traders. Traders must always be mindful of the interest rate differentials of their preferred currency pairs, data that is often posted on various forex websites. As for anticipating the future, it is advisable to follow a number of analysts and then average their expectations. Central bankers will often speak publicly, another place where they might reveal their thought processes.