The biggest price movements , lately are caused by central banks and their interest rate decisions as well as following statements, press conferences, bank's officials, etc. What are interest rates is something that can be read in our basic term section. What interest us in this part is how do interest rates affect market?  Interest rates dictate flows of investment. Since currencies are the representations of a country’s economy, differences in interest rates affect the relative worth of currencies in relation to one another.

However, a period before the very decision is announced is also very important. Any indication that any central bank is even considering a change can cause a drastic move in the currency. That is why markets can be volatile ahead of the decision. Once decision is released, even if interest rates remain unchanged, and this is the most likely scenario, since interest rates are not changed very often, central bank presidents come into play. Depending on the statement/press conference that usually follows the decision, that is the tone of the statement and whether is it hawkish or dovish (hawkish – good for currency, dovish – bad for currency) can have even greater role than the decision itself.

In the following statement usually economic problems country or some region is facing to are addressed. Key factors of the statement are views in regard to labour market, inflation and future economic growth. If central bank expresses optimistic view on these factors, like stability in labour market and expectations on future growth, inflation that is persistent with the target and further economic growth in months to come it is likely that currency will raise. Oppositely, if the central bank expresses negative attitude to this and possibly announces some new monetary measures that would back up economic growth sharp decline in currency can be expected.

In the end it is important to note that decision of the central bank does not necessarily affect single currency. For example, ECB Press Conference can also have strong impact on GBP/USD pair, since Great Britain is part of the EU. Interest rates bring a lot market volatility, and successfully predicting the outcome of monthly meetings can brought huge gains, however it can also result in serious losses, so traders must carefully weigh their positions ahead of it.

In the next chapter we will say more on how geopolitical events affect Forex markets.  

Last modified on Saturday, 01 April 2017

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