Influence of interest rates on the Forex market

Exchange rates of the world's major currencies are created when banks trade on the world market and are determined by supply and demand for a particular currency. A country's currency will be in demand and competitive in the market if the country's economic and political condition is stable.

У central bank any country has a large number of financial instruments to maintain the stability of its own national currency. The main method for accomplishing this task is to regulate the amount of money in circulation. A surplus of one currency in the market creates an increased supply of it and causes a decline in the exchange rate of that currency in relation to others. In turn, a shortage of currency in the market generates a demand for it and will lead to an increase in the exchange rate.

In modern conditions, central banks are widely used to influence the exchange rate of the national currency (along with currency interventions)  method of regulating interest rates. There are many types of interest rates: official, bank, interbank, deposit, etc. For market The official and bank interest rates are more interesting. Official interest rate - is the rate at which commercial banks borrow money from the central bank. Bank interest rate - is the amount of the fee to the bank for the use of a monetary loan, expressed as a percentage.

All types of interest rates are related to each other and are determined by the official interest rate, which is set by the central banks in their countries. Decreasing interest rates leads to an increase in business activity and increases inflation, while the exchange rate of the national currency falls. Increase in interest rates In turn, on the contrary, leads to a decrease in business activity, a decrease in inflation and an increase in the exchange rate. Due to the fact that all interest rates are related to each other we have the following pattern - the higher the official interest rate in a certain country, the more people want to buy the currency of that country in order to deposit funds at a higher rate, and therefore the rate of that currency is growing.

The main money supply of the market is concentrated in the U.S. banks, so the market reacts very sharply to changes in the official interest rate in this country. The market instantly reacts not even to a change in the U.S. interest rate, but to opinions about its possible change. If the opinions are optimistic, then the market forms a stable upward trendThe pessimistic ones, respectively, have a downtrend.

Usually, when the head of the U.S. Federal Reserve (Fed) announces an interest rate change, the market is already overbought or oversold and is often followed by a direct reverse reaction in the form of a pullback. The effect of interest rate changes on the market (this is the basis of fundamental analysis) should be clearly understood and used by the trader to enter and exit the market accurately.