The Moving Power of Interest Rates in Forex

Sudden interest rate adjustments can bring about huge deficits or profits in forex trading. We should have an idea of how it affects forex trading. Here are examples of how interest rates influence the value of currencies.

For instance, in 2006 the Bank of England made a startling move with its interest rates. It suddenly jacked up its short-term interest rates from 4.5 to 4.75 percent. Perhaps we'd ask how a rise of .70 percent could hurt so much in forex. In reality, even a small percentage of increase in interest rates often translates into millions of dollars in forex. At that time when the Bank of England made that increase Japan pegged its interest rates to .25 percent.

But that interest rate adjustment broadened the difference between the pound and yen from the basis points of 425 to 450. Consequently England enjoined an all-time high of money investments pouring into its forex market. Traders were buying pounds in enormous amounts to anticipate a good return from the new spread. Thus, as there was more demand for pounds its value improved tremendously. As a result the spread between yen and pound also widened. This interest rate adjustment and demand for pounds paved the way for a 700-point rally for a period of about 21 days.

Another example is how differences in interest rates are used to forecast trends in promising trade deals for forex traders. Here, we make short and long term investments as basis. For our long term basis we use principles that back major premises or themes present in forex market forces. For our short term basis we use major news developments that are likely to influence forex trading. All these we employ to foresee a possible adjustment in interest rates.

Like what happened in the last quarter of 2007 when a short term interest rate adjustment involving the yen and Australian dollar (AUD) happened. There was an unexpected plunge of consumer prices in Australia and the Australian market was in bad need for high inflation figures. Low figures reflecting inflation was unlikely to trigger interest rates to spiral up, hinted the news, so the AUD suffered tremendously against the yen. As expected traders speculated that, with such news, no interest rate rebound was likely to happen.

Hence, interest rates are powerful forces that can move forex trends to extremes. This is further empowered by short or long term basis for a sudden shift of interest rates and currency value.

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