The interest rate level of a country is a decisive reason for the investment behaviour of trading on the forex. Changes in the key interest rate are of great importance for the respective countries. That is why the decisions of the central banks are very interested in the market participants. The reason for this is easy to understand. The higher the interest rate, the greater the demand for the national currency. Interest rates in Forex therefore determine the chances of trading.
What is the interest rate?
The interest rate is the price of the money that must be paid when a market participant wants to borrow money. The interest payable also includes a risk surcharge for the borrowed money. For this reason, the lenders of money will be credited with an assessment of the creditworthiness and will be used by credit rating agencies to make interest rate decisions. The interest rate is also an important tax instrument for regulating national economic factors. These can also affect each other, such as inflation within a currency area. Changes in interest rates help to change the monetary policy of a country.
Impact of the interest rate on the forex
The interest rate in one currency area in relation to another determines the demand for a currency. An increase in demand also affects the growth of the interest rate. The increase in interest rates will always persuade investors to ask the currency of the respective country. The increasing exchange rate of the currency is the basis for the participants in the forex to achieve the goal of their trading strategy to achieve maximum profits.
Opportunities to earn interest rate changes
The first option is the net interest income. The investor acquires fixed-income securities and profits at the offered interest rate. There is also the possibility of exploiting interest rate differences between countries. Funds are included in a low-interest country and are profitable in countries with higher interest rates. The much easier way is to trade the respective currency pair on the forex and achieve a pure capital gain. Speculative profit can be generated by trading currency pairs in anticipation of an interest rate change. These expectations are supported and projected by developments in the economic situation in a currency area.
Factors for interest rate developments
The most important factors for the development of interest are the demand and the supply of credit. Loans are being more and more in demand in a good economic economy. Demand is also rising as domestic demand rises. In crisis situations, domestic demand will often be the first, and thus the demand for products and thus again with lower utilisation of production facilities, the willingness of companies to invest.
Another factor is the declining purchasing power of a currency through rising inflation. In order to counteract a devaluation of money, interest rates are increased by the money providers. Development in the labour market also has an impact on interest rate developments. High unemployment always has a negative impact on the demand for money. Central bank decisions are a key factor in the global demand or supply of a currency. A general factor for interest rates is always the duration of the demand for money. The forecast for future development determines the price of long-term loans.
Forex interest rates – forecasting techniques
The development of interest rates is a long-term issue. This is why the fundamental analysis is used superficially. The foundation of trade is the economy of the State, the region, the world. The means to keep the economy in the flow is the money. In the fundamental analysis, the trader is familiar with the economic figures of a country. In addition, there is an assessment of the political situation. Fundamental analysis requires a good sense of the country’s development. Since this analysis is very difficult, the trade should be limited to a small number of currency pairs. Finally, the most important key figures are listed here:
– Key interest rates
– Unemployment figures
– Employment figures
– Consumer Price Index
– Retail Sales
– Debt and bankruptcies.
Summing up the most important thing. It is not only the current interest rate level that moves the FX market between the individual currencies. The expectations in its development are the decisive force. Therefore, any information that could change this ratio is crucial to the trader’s investment strategy. The above-mentioned economic indicators will be dah