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Interest rate is the driving force behind the dynamics of exchange rates. All you need to know
Interest rate change is a significant event for any trader, as it directly affects market exchange rates. Three important events are scheduled this week: meetings of the Central banks of the United States, the United Kingdom, and Switzerland. This means that traders have three times more reasons to make money. Today our FOREX_WEDNESDAY section is dedicated to everything you need to know about the interest rate and why it is so important for financial markets.
Let's start with the theory. The interest rate is the percentage at which the national bank of the country credits commercial banks. If the rate is high, then loans are more expensive, goods in the markets also become more expensive and competitiveness declines. As a result, the demand for loans falls, inflation slows down and the currency rises in price. It also works in the opposite direction: when the rate is low, loans are issued at lower interest rates, which makes it possible to sell goods cheaper—inflation accelerates and the currency becomes cheaper.
Who regulates the rates and how often? Interest rates are regulated by the Central banks of each country. Central banks independently determine the timing of the revision of rates. The table below provides information on current interest rates of central banks and the dates of the next scheduled meetings.
Why Central banks change interest rates. Most often, the central bank raises the rate in order to prevent overheating of the economy, as happens if prices can not grow further and grow without a real increase in the production of goods and services. Lowering the rate is a stimulating measure that accelerates economic processes, reduces taxes and unemployment.
How do changes in interest rates affect the Forex market? Interest rate is one of the strongest economic indicators. It can drastically change the trend and turn the price of a trading instrument in the opposite direction. Thus, the market almost always reacts to changes in the interest rate by an active rise or fall, which allows traders to profit on short-term price fluctuations at the time of publication of the data.
A decrease in the interest rate often leads to a downtrend, or bearish trend, and an increase leads to an uptrend, or bullish trend, in the market. It is worth noting that the market reaction to the future interest rate begins before the actual changes. Forex can even respond to rumors of upcoming changes: if forecasts are optimistic, then a steady uptrend is forming in the market, and vice versa.
Keeping an eye on interest rates is really important for traders as it allows them to understand the global currency trend and use this knowledge in building their future trading strategy. Excellent trading conditions provided by Forex.ee help traders in achieving financial success:
• Order execution speed of 200-300 ms allows you to instantly respond to any market fluctuations and constantly monitor the latest trends in the market.
• A variety of trading instruments for all traders: more than 50 currency pairs and more than 40 cryptocurrency pairs are available for trading.
• One of the tightest spreads in the industry reduce your trading costs.
Test the Forex.ee trading conditions without making your own deposit with a $15 Welcome Bonus and climb to the top of the financial Olympus of the Forex market with a reliable broker! The decision on the Fed interest rate will be announced today, March 20, at 21:00 Moscow time.