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Business / Finance

How interest rate affect currency

Portal Forex trader 12.05.2017 at 12:08

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Good day, fellow traders!

the Subject of interest rates is often on the agenda of various media, and many already know that this is closely linked to the global economy and global Finance and in some way influences the processes occurring in the currency markets.

But that in fact represent interest rates and why they affect the trends in Forex ?

Below is a small analysis of the forces driving monetary policy and trends in the markets, including Forex.

the Official interest rate of the Central Bank (discount rate, refinancing rate)

It is the interest rate at which Central Bank gives loans to commercial banks. Those, in turn, make loans to commercial companies focusing on this official rate. If the stakes are high, and loans are more expensive products on the markets and therefore less competitive. The demand for loans falls, inflation slows down and therefore the currency becomes more expensive.

conversely, if rates are low, then commercial banks and then of the company to borrow at lower interest rates (sometimes negative) that allows you to sell goods more cheaply, the Central Bank prints more money, inflation accelerates and the currency depreciates.

Monetary policy: why and how rates are regulated

the Stakes are high and low. However, these values are always relative, and it is therefore important to consider rather historical dynamics and the growth/decrease in relation to their historical values.

Photos from the March meeting of the officials of the Federal Committee on monetary policy of the USA (FOMC)

the Central Bank raising interest rates to prevent overheating. This happens when in the economy there is no room for growth, and prices begin to rise out of the real increase in the production of goods and services, leading to inflation and reducing trade currency.

the Growth rate slows down inflation and making the currency more attractive to investors and commercial banks put investors ' funds on Deposit at higher interest rates.

the reduction in the rate, on the contrary, is promotional in nature and serves to accelerate economic processes, cheap loans for business, low taxes, reducing unemployment and increasing business activity. This speeds up inflation and reduce the trade currency.

When and how are often governed by rate

, Central banks are free to determine the timing of interest rate revision. For example in the US the rate are governed by the Federal open market Committee (FOMC). And needless to say that during their meetings, the whole world is watching. And usually special committees of the national Central banks accept a particular monetary course in the beginning of the financial year, but if anything can change it later.

the EU is regulated by the refinancing rate of the European Central Bank. In The UK The Bank Of England. In Japan, Bank of Japan and so on. Markets are also taken into account the rates of Switzerland, Canada, RBA, Norway, China, India, Korea and some European countries such as France, Italy, Germany, Spain and others.

find out More about current interest rates of different banks here .

What happens in the Forex market

If you have opened an economic calendar and discovered that the officials of any national Central Bank are going to make a decision on interest rates — the rate may change and alter the trend, depending on, reduce them or increase.

, Or rates can stay at the same level, and then the trend will be determined on the basis of the current dynamic: if the last time rates were reduced, then the trend will be bearish, but if raised, then bullish.

generally, prospects for growth or decline rates advertised repeatedly over long periods of time before they will change. These are long-term investors and position traders to make a profit or to avoid risks.

the Output is

to Monitor interest rates it is important to understand the global foreign exchange market; Reduction of interest rates stimulates the economy, and higher cools economic growth; Interest rates rise the currency strengthens, if you're seeing something weaker; to Track the dynamics of changes in the interest rates of the leading Bank here.

With respect, Alexey Vergunov