Many Forex traders get confused when deciding which fundamental release to follow when making a trading decision. I suggest to these traders, follow the press releases that potentially the interest rate of a currency. This article explains why interest rate movements are important to the value of the currency.
Alle the currencies has an interest Forex rate. This is an indicator of the weakness or strength of the current economy.
A long side a nations economy is increasing, the prices are rising as the consumers are spending more money in the daily life. It’s a simple circle of life, which means that the consumers are spending more if the possibilities are available, and people have access to them. But if the prices are getting higher on the goods, then the inflation may increase.
If we don’t watch the inflation carefully, then the money will be less worth and the daily needed items like bread, milk and butter can go up to higher and higher prices. We saw an example of that in Germany in the years between the World Wars, where the inflation increased so much, you had to pay almost a billion mark for a loaf of bread. Maybe your are thinking that this will not happen and it’s very unlikely to happen, but this exact scenario is the hard truth for some countries with very high inflation Forex rates. Fx. is Zimbabwe one of these countries that suffers from inflation. The national bank will have to take some precautions to prevent this to happen. This will be things like raising the rates and interests before it get’s out of control.
Higher interest Forex rates will make it more expensive to loan money, which prevents people from purchasing homes, credit cards spendings, and in general taking debt on regular credit cards.
The same scenario will then also happen for the companies in the country, if the Forex Rates are sky rocketing with out control of any kind. If the companies looses the options to invest and hire people, then there will be more people with out jobs, and the circle is complete.
The Central Bank has a very important role here, to balance these general Rates and also Forex Rates, so growth in the country will continue and the inflation is stable.
High interest rates can have a side-effect which will keep investors from foreign countries to invest in companies and assets in the country. The investor seeks the highest possible returns, so there for is logical that nobody will invest in a country where inflations has take a toll.
It’s simple to figure out, if a countries are giving a high kickback on investments, then more investors will come and spend their money. This is a dream scenario for all countries. If a country’s stock market is doing well and they offer a high interest rate, foreign investors are likely to send capital to that country. The currency in a country is also very affected from these things.
You can see that it’s not the rate itself which is important, it is also the direction of the interest Forex rate that can act as a good parameter for the demand of the currency.
The accompanying statement is analysed word for word for any signs of what the central bank may do at the next meeting. Remember, the interest rate decision itself tends to be less important than expectations for future interest rate movements.
High and upcoming Forex rates at the beginning of an economic expansion can generate growth and value in a currency for a country. But also a low and declining rate can represent a country getting in a difficult economic situation, which reflects the reduction in the value of the currency.