Get to know How Interest Rates Affect Forex

Interest is what we pay when we borrow money. It is the cost of credit, and because of its compounding effect on loans, there are numerous lending services and credit products in the financial market.

One very important interest rate is how much the governments pays for loans.

In the US, this interest rate is known as the Federal Funds Rate and is set by the Federal Open Market Committee (FOMC) of the Federal Reserve.

Why interest rates are important:

  • Interest rates determine the amount of resources needed for related credit expenses, such as paying minimum loan payments towards outstanding debts.
  • The Fed Funds rate is the main mechanism to implement monetary policy between the government authorities and the market.
  • In modern economies, have a well-controlled monetary policy that is public and transparent provides the flexibility of a free market without overly restricting commerce and trade.



Controlling inflation

Inflation is the rising of prices related to the cost of economic goods, including property, and wages, and is connected with the capital markets.

If companies are growing and the economy is expanding, there can be risks of prices increasing too fast relative to wages, which can have negative consequences.

By raising interest rates, governments are able to slow down the rate of growth so that it is more sustainable, along with helping to keep prices in line with wages.

Controlling deflation

On the other hand, price deflation and too much of a slowdown of economic growth can hurt jobs and the local economy, requiring stimulus and for interest rates to be lowered.

By lowering interest rates, the cost of credit becomes cheaper, making it easier for consumers and companies to borrow money, which in turn, can stimulate economic growth.

Monetary policy and forex

To control inflation and deflation, monetary authorities use interest rates to keep various economic indicators such as the unemployment rate, within certain ranges. One of the biggest impacts from monetary policy changes, can be on the country’s national currency.


banks foreign exchange trading

In other words, when the US Federal reserve changes interest rates or announces important updates or decisions, the effects on the forex market can be significant and lasting.

We discussed relating themes in the article titled “Fundamental Factors that Affect Forex.”

Therefore, while trying to carry out monetary policy to manage the prices in real economies, exchanges rates are an important element in the equation:

“The variables of adjustment will be the exchange rate of national currency related to other currencies worldwide.”

Here is our point of contact between Interest Rates and Forex Pairs:

We see a low level of interest rates in the major economies continuing to persist. Therefore, all market participants watch carefully what’s going to be the next movement from the Fed, and within the markets for US Government bonds.

One example is the Treasury bond (T-bond) which are fixed-interest.

T-bonds are U.S. government debt securities with a maturity of between 10 and 30 years. They are considered a very low-risk asset, and almost equivalent to holding cash, and are commonly used as a benchmark against other assets.

Our view as of early 2020 is that US dollar tends to lose value facing other currencies. However, this forecast has changed due to the Covid-19 and news on trade war. Despite that, our AI has hit an impressive accuracy on live-trading.

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Disclaimer: Forex and Contracts for Difference (CFDs) are complex instruments and come with a high risk of losing money due to leverage. Forex trading is not suitable for everyone. You should consider whether you understand how forex and CFDs work and whether you can afford to take the high risk of losing your money.

The forex brokerages displayed shall disclaim the overall performance of traders in their platforms. Oanda warns that 76.8% of retail forex traders lose money trading CFDs. XTB warns that 80% of retail forex traders lose money trading CFDs. The forex broker Fxcm warns that 69.66% of retail forex traders lose money trading CFDs.

The performances aforementioned are not related to Wiseinvest AI forex trading and AI forex signals system. You can check the performance of our AI forex system on our dashboard.