Rates of major currencies always emerge in the process of trading the world’s largest banks. Here works the law of supply and demand for a certain currency. The stability of the economic and political situation in any country makes its currency more popular in the world market.
Among the most important factors affecting exchange rates, can be called the interest rate. It is closely linked with global economy and Finance.
The official interest rate of the Central Bank
The Central Bank of any country is designed to control the cost of credit. The refinancing rate is the main rate. This parameter is used by the Central Bank in various transactions with other banks and credit institutions. In fact, the official interest rate is the interest rate at which it lends money to other commercial banks.
Then they are given loans to various commercial structures under different percentage, but the proportion of the official rate. Too high interest rates make loans more expensive. Reduced the amount of available capital for other banks. As a consequence, commodity prices are rising, too. Their competitiveness decreases. Credits become unclaimed. However, blunted the rise in inflation in the state. The national currency becomes more expensive, therefore, begins to look more attractive tool in the eyes of investors, and its course in the Forex market increases.
Low refinancing rate has the opposite effect. Commercial banks take loans on more favorable terms as the interest is lower. Sometimes it can be negative. Products cheaper. Lack of money forces the Central Bank to include the printing press, which leads to an increase in inflation. Currency depreciates.
How are interest rates
The interest rate is relative. Since this parameter is the main lever of influence on the rate of the national currency, the Central banks being behind closely.
There are times when the economy has no place for growth. In this case, the price increase is no real gain of production of various goods and services. Inflation begins to rise, and the rate of the national currency to decline. The Central Bank raises the deterioration of the economic situation in the country. This measure is used for stabilization and deceleration of inflation. Once the currency is of increased interest to investors, commercial banks placed their funds on Deposit at higher interest rates. Usually the refinancing rate of increase in the period of rapid economic growth.
The policy of rate cutting is carried out in a period of recession in economic activity. “Cheap” loans are an incentive for borrowing in the Central Bank. Credit resources of commercial banks increase. Reduced taxes, unemployment, increasing business activity that promotes economic growth. However, trading currency is reduced.
By whom and with what frequency are governed by rates
Central banks are free to determine the timing of revision of the refinancing rate. In the United States of America this function performs the FOMC (Federal open market Committee). In the EU this regulator is the European Central Bank. Typically, these structures define the monetary rate at the beginning of the financial year.
Depending on certain circumstances, this course may subsequently change. All markets take into account the rates of the most economically developed States such as the UK, Germany, Switzerland, China, Japan and others.
What is happening in the market Forex
Change in rates of refinancing in the Forex market almost always causes active price movement. At the time of publishing of important economic news, volatility of assets increases dramatically.
Traders often use this time for profitable trading in the currency market. Opening economic calendar and determine the time of the news, a trader in just a few minutes can put pending orders for the purchase and sale of tradable asset.
In the picture you can see how to change the price of the currency pair EURUSD at the time of the decision of the European Central Bank’s interest rate. In this case it was reduced from 2% to 1.75%. On the chart there is a “bearish” trend.
The increase in interest rates typically causes a rise in the asset price. The number of investors wishing to purchase currency in respect of which the decision will increase dramatically.
Since the money supply is concentrated in banks of the United States of America, news about the refinancing rate in that country are on the market sharp the hype. The time of speech of the head of the Federal reserve system is associated with the “overbought” or “oversold” market. The art of The trader is in determining the exact point of market entry and exit.
The most important discount rate for long-term traders. It’s pretty simple. High yield increases the interest earned on currency investments, thereby increasing profit.