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Interest rates and Forex
The interest rates of the world's leading Central banks, or, more importantly, expectations of changes in these rates in the near future, is perhaps the most significant factors that affect the currency markets.

The reason behind this, is that market participants will naturally seek to move their assets in high-yielding currencies. Accordingly, for this reason, countries with higher interest rates will receive a much larger infusion of capital in the form of own currency.

As a rule, countries with higher interest rates should expect that their currency will increase in value, while countries with lower stakes should understand that their currency will weaken.

However, as mentioned above, the real key to predictions of the dynamics of the currency markets is how to identify those currencies, interest rates which will soon begin to change. It is equally important to assess the direction of future changes. Very often before the time when the Central Bank of any country increases interest rates, this decision is likely already "priced" by the market. The country's currency has now been entrenched and will not be too responsive to the fact of increasing rates.

Therefore, a key driver of the Forex market is to assess any expected by investors and analysts, changes in monetary policy by global Central banks.

If, for example, the rates for some time steadily declined, and traders finally decided that the rates have reached their lowest point, they start buying the currency in the expectation of further rate hikes.

In fact, sometimes the actions of the traders have changed their assessment of the market situation, can so change economic climate to affect future results.

It is important to "assess" the news releases and economic reports as they can actively influence the expectations of traders, even if the opinion and policy of the Central banks remains the same. However, it is also possible such situation, when the market is "estimated" expected events that never happened in reality.

Here is an example from recent history. Being Ben Bernanke on a post of the President of the fed held a regular meeting of the FOMC, from which all market participants expected a reduction of quantitative easing . However, the FOMC decision went against expectations, and current levels of QE ($85 billion per month) has been retained.

Shortly before this event, the market was convinced that Bernanke will taper its asset purchases, traders began to sell stocks and buy U.S. dollars. Since tapering QE is a predatory and deflationary effect, that in theory it was supposed to be a bullish factor for the greenback.

However, Bernanke surprised the market and decided not to "taper" (QE taper). The result was that soon the stock again rose in price, and the dollar has basically lost its recent gains, as traders again reacted to changing expectations.

Interesting that Bernanke and in fact did not make any hints that the FOMC will vote for the "taper" at its next meeting, but positive economic reports convinced traders that it will happen.

As a rule, most of the time foreign exchange rates change in a particular line with market expectations. However, in some cases (as in this example), the situation can develop, defying market expectations - if the risk/reward for the players will be quite high.

Category: Forex | Added by: (29.10.2017)
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