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How Interest Rates Affect Exchange Rates?

The most important economic news can have a significant impact on currency exchange rates。Forex traders know how to trade based on news (by interpreting information about economic events) to make money。

利率是如何影响汇率的?

The most important economic news can have a significant impact on currency exchange rates。Forex traders know how to trade based on news (by interpreting information about economic events) to make money。

Indicators traders are looking at include inflation data, unemployment data and central bank interest rates。The latter produces the most important movements in the foreign exchange market, thus creating profit opportunities during the press release。Increases or decreases in key interest rates can also have a solid and lasting impact on the economy, allowing traders to trade according to established trends and earn profits。

The link between interest rates and exchange rates

To understand how interest rate fluctuations affect exchange rates, the concept can be understood through real-world parallels。Suppose there is a deposit in a commercial bank.。If a bank next door raises the deposit rate and exceeds our bank's rate, it is prudent to consider transferring funds to the bank next door for a higher return。

In the real world, there are similar dynamic developments。When the central bank raises interest rates, it raises the yield on money market instruments, attracting investors。This triggers a flow of capital from one economy to another。However, to obtain more profitable assets, investors must buy their own currency。Thus, when the key interest rate rises, the exchange rate of the national currency also rises。

Octa financial market analyst Kar Yong Ang said: "Every day, there are 7.$5 trillion in transactions, of which 6.$6 trillion involves dollars。Therefore, when the official interest rate in the United States changes, the reaction of the foreign exchange market will be quite sharp。The Fed is expected to cut key interest rates at least twice in 2024, which would leave the dollar quoted well below current levels.。"

What is News Trading??

News trading is a strategy for traders to trade directly at the time of news release。A strong source of price volatility in global markets is news about politics and the economy, inflation, unemployment, the introduction of sanctions taxes and natural disasters.。These news will cause a strong reaction in the currency market。

Price dynamics during a news release are generally predictable and divided into three phases:

  1. Price consolidation。At this stage, traders usually study the economic agenda, prepare for the launch, and sometimes place pending orders。

  2. Message appears。At this stage, there will be brief sharp fluctuations and directional changes in the price of the currency pair.。This is the main opportunity for traders to profit。

  3. Development of price movements and subsequent reduction of volatility。After initial sharp fluctuations, price movements tend to develop further and fluctuations gradually decrease。

The price consolidation phase can last from one hour to several days.。The reaction phase to the news lasts an average of 5 to 30 minutes, with the largest changes occurring in the first minute。Development phase lasts 30 minutes to 4 hours。Depending on skill, knowledge and trading style, traders can take advantage of any of these stages。

Conclusion

Since the most important volume of transactions in the money market is in U.S. dollars, it is significant to focus on the Fed's decisions on interest rate changes。The next meeting is scheduled for March 20, 2024。Monetary policy in the United States is generally dovish, which means that the dollar tends to fall against all major currencies in 2024。

Disclaimer: The views in this article are from the original Creator and do not represent the views or position of Hawk Insight. The content of the article is for reference, communication and learning only, and does not constitute investment advice. If it involves copyright issues, please contact us for deletion.