Interest Rate the Primary Drive

Interests rates worldwide is a key factor in Forex fundamental analysis. Interests drive the forex rates to a great extent. Generally speaking, the interest rate rise will likely to appreciate the currency when nothing else changes, and vice versa. The underlying reason is more than simple, a rise in the interest rate will make the currency worth more in future. To counterbalance the effect, the currency has to appreciate.

What forex traders see in interest rate is not like economists, who base on the change of the interest to calculate the generally effect on the economy. Forex traders believe the direction of the interest rate is more important. That’s because Forex traders take interest as a fundamental indicator, or fundamental signal. The directional change of interest indicates the market sentiment and perception is going to be affected much bigger than otherwise. However, if the central bank raises interest at consecutive periods, that’s a forex signal to investors that the currency rate is going to up probably quite significantly.

Interest rate is a tricky Forex fundamental indicator. Regardless of the general perception like I described above, the relationship between interest rate and inflation needs special elaboration for Forex traders.

Decreasing the interest rate of a currency does make its currency less valuable. However, the appropriate interest rate drop will stimulate the economy by producing higher GDP level. And a GDP rise will definitely be bullish signal to the entire Forex market. Therefore, comprehensive understanding of interest rate , this fundamental indicator is needed indeed.