HFM information and reviews
Octa information and reviews
FXCC information and reviews
FxPro information and reviews
FBS information and reviews
Vantage information and reviews

How does interest rate affect currency rates? How to make money on interest rate changes?

Currency rates are significantly affected by the most important economic news. Forex traders know how to ‘trade on the news’ — seek to earn money by interpreting information about economic events. Among the indicators that traders pay attention to are inflation data, unemployment data, and the Central Bank's interest rate. The latter generates the most vital movements in the Forex market, thus creating an opportunity to make a profit during news publication. The increase or decrease of the key rate also has a solid and lasting impact on the economy, allowing traders to earn money by making transactions on the formed trend.

What is the correlation between the level of interest rate and the exchange rate?

To grasp how interest rate fluctuations affect exchange rates, we can look at the concept through real-world parallels. Let’s imagine we have savings deposited in a commercial bank. If a bank next door raises its deposit interest rates and surpasses the rate of our bank, it would be prudent to consider transferring our funds to the bank next door and capitalise on the higher returns.

In the real world, a similar dynamic unfolds. When a central bank raises its interest rates, it boosts yields on money market instruments, enticing investors. This triggers a flow of capital from one economy to another. However, to access more lucrative assets, investors must purchase the national currency. Consequently, when the key interest rate is elevated, the exchange rate of the national currency rises as well.

'Every day, there are $7.5 trillion transactions in the currency market, with $6.6 trillion involving the American dollar. Therefore, the foreign exchange market reacts quite keenly when the official interest rate in the United States changes,' said Kar Yong Ang, the Octa financial market analyst. He added that at least two key rate cuts by the U.S. Federal Reserve are expected in 2024, which would bring dollar quotes well below the current levels.

What is news trading?

News trading is a strategy in which a trader makes transactions directly at the moment of news publication. A powerful source of price fluctuations in the global markets is news about politics and economy, inflation, unemployment, the introduction of sanctions duties, and natural disasters. Such news causes strong resonance in currency markets.

Price dynamics during the publication period is typically predictable and is divided into three stages:

  1. Price consolidation. This phase usually involves traders studying the economic agenda and preparing for the publication, in some cases placing pending orders.

  2. Emergence of information. This stage witnesses a sharp burst of volatility and a directed change in the price of a currency pair for a brief period. This presents the primary opportunity for traders to make profits.

  3. Development of price movement and subsequent decrease in volatility. Following the initial surge in volatility, the price movement tends to develop further, and volatility gradually decreases.

The price consolidation phase can last from one hour to several days. The reaction phase to news lasts from 5 to 30 minutes on average, with the most substantial change occurring in the first minute. The development phase lasts from 30 minutes to 4 hours. Depending on the skills, knowledge, and trading style, a trader can take advantage of any of these phases.

We have understood that interest rates affect the currency rate. Since the most significant volume of transactions in the currency market is carried out with the U.S. dollar, it makes sense to focus on the decisions of the U.S. Federal Reserve System on interest rate changes. The next meeting is scheduled for 20 March 2024. The U.S. monetary policy is generally dovish, meaning the dollar tends to decline against all major currencies in 2024.

Octa is an international broker that has been providing online trading services worldwide since 2011. It offers commission-free access to financial markets and various services already utilised by clients from 180 countries with more than 42 million trading accounts. Free educational webinars, articles, and analytical tools they provide help clients reach their investment goals. The company is involved in a comprehensive network of charitable and humanitarian initiatives, including the improvement of educational infrastructure and short-notice relief projects supporting local communities. Octa has also won more than 60 awards since its foundation, including the 'Best Educational Broker 2023' award from Global Forex Awards and the 'Best Global Broker Asia 2022' award from International Business Magazine.

Share: Tweet this or Share on Facebook


7 Common Investment Myths That You Probably Believe
7 Common Investment Myths That You Probably Believe

The reason why the investment market is so unique is that almost everyone knows what it is, and almost no one understands how it works. It gets even worse. You see since it’s so popular in popular culture/cinematography, a lot of people have illusory scenarios of how this should work.

Is it Easy to Learn Forex? A Comprehensive Guide to Mastering Forex Trading
Is it Easy to Learn Forex? A Comprehensive Guide to Mastering Forex Trading

Forex trading is a popular and potentially lucrative way to earn both active and passive income. However, it's essential to understand that learning forex is an ongoing process that doesn't depend on whether...

Exploring the Trustworthiness of Forex Trading: What You Need to Know
Exploring the Trustworthiness of Forex Trading: What You Need to Know

Forex trading is indeed a legitimate and trustworthy way to engage in financial markets and potentially reap profits. However, it exists within a complex industry where both rewards and risks can be exceedingly high...

Beginner's Guide to Forex Trading with FXTM
Beginner's Guide to Forex Trading with FXTM

If you're new to the world of forex trading and looking to embark on your trading journey, you've come to the right place. Forex trading can seem complex at first, but with the right guidance...

Common Mistakes Made by Novice Traders and How to Steer Clear of Them
Common Mistakes Made by Novice Traders and How to Steer Clear of Them

Trading in the financial markets is a realm that beckons many, but it is fraught with challenges that often go underestimated by novice traders. A lack of profound understanding of market intricacies...

Demystifying Stock Exchanges: The Heart of Financial Markets
Demystifying Stock Exchanges: The Heart of Financial Markets

Understanding the inner workings of stock exchanges is crucial for traders and investors. These financial powerhouses are more than just platforms for trading...

MultiBank Group information and reviews
MultiBank Group
XM information and reviews
FP Markets information and reviews
FP Markets
FXTM information and reviews
AMarkets information and reviews
BlackBull information and reviews

© 2006-2024 Forex-Ratings.com

The usage of this website constitutes acceptance of the following legal information.
Any contracts of financial instruments offered to conclude bear high risks and may result in the full loss of the deposited funds. Prior to making transactions one should get acquainted with the risks to which they relate. All the information featured on the website (reviews, brokers' news, comments, analysis, quotes, forecasts or other information materials provided by Forex Ratings, as well as information provided by the partners), including graphical information about the forex companies, brokers and dealing desks, is intended solely for informational purposes, is not a means of advertising them, and doesn't imply direct instructions for investing. Forex Ratings shall not be liable for any loss, including unlimited loss of funds, which may arise directly or indirectly from the usage of this information. The editorial staff of the website does not bear any responsibility whatsoever for the content of the comments or reviews made by the site users about the forex companies. The entire responsibility for the contents rests with the commentators. Reprint of the materials is available only with the permission of the editorial staff.
We use cookies to improve your experience and to make your stay with us more comfortable. By using Forex-Ratings.com website you agree to the cookies policy.