Forex trading is more affected by interest rate changes made by any of the world’s eight central banks than any other influence. These banks include:
- The Fed (U.S. Federal Reserve System)
- ECB (European Central Bank)
- BoE (Bank of England)
- BoJ (Bank of Japan)
- SNB (Swiss National Bank)
- BoC (Bank of Canada)
- RBA (Reserve Bank of Australia)
- RBNZ (Reserve Bank of New Zealand)
All of these banks have the power to force instant movements in the markets. Forex traders therefore have to learn how to predict and quickly attend to any volatile moves that occur in any of the currencies of these banks in order to maintain high profit levels.
Interest rate movements are most critical to the fortunes of forex traders because of the opportunity to experience a higher rate of return than would otherwise be expected, as the larger the interest obtained on any invested currency, the higher the profit.
The biggest risk however, when using this type of strategy in forex trading is of course currency fluctuation. Fluctuations in any currency are able to offset any interest bearing gains if not foreseen accurately. It is worth noting here that it is not always a wise move to fund higher interest currencies with those with a lower interest, despite the common urge to do so. If it were to be that easy everybody would be making their fortunes with forex trading, you can learn more on this strategy in Currency Carry Trades Deliver.
This doesn’t mean you shouldn’t view interest rate movements as a means of making money, you should, but while doing so be careful to keep an eye out for unexpected fluctuations. To be better prepared it would be a wise move to study how interest rates are calculated. This happens at a meeting of each of the eight central banks’ board of directors. These boards control the monetary policy of their individual countries, and in doing this also control the short term interest rate of their various currencies. Their interest rates determine the price banks within those countries can borrow from one another. If inflation within a certain country is trending upwards its central bank will raise interest rates. They will lower interest rates if they feel more money is needed to boost their economy.
You can make yourself an astute watcher of what is happening within these main currency countries by studying the following indicators:
- Housing markets, for example are house prices trending upwards, remaining stable, or trending downwards.
- The sub-prime market conditions.
- Employment levels.
- Consumer spending.
- Consumer price Index (CPI).
When you are knowledgeable regarding these indicators you will find yourself better able to estimate any possible rate change. For instance, if a country’s economy is going along well, rates will either increase or remain steady. If any of the signs indicate problems starting to show in an economy it could indicate a cut in interest rates are imminent. This is what makes forex trading a skillful venture that requires a lot of serious thought and consideration.
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1 thought on “Forex Trading During Interest Rate Changes”
Trading forex is not that difficult as most people assume.With fundamental analysis even my mother can now trade forex with ease.All you need do is know the exact time there is going to be a movement,login to you account and take profits.