Interest Rates and Forex: How Central Banks Move Currency
Central bank interest rate decisions are the single biggest driver of currency prices. Learn the relationship. How rate decisions move pairs, and how to.
The Core Relationship
Higher interest rates attract capital, strengthening the currency. Lower rates drive capital away, weakening the currency. This is the fundamental driver of forex — everything else is noise around this signal.
How Rate Decisions Work
- Rate hike: Currency typically strengthens — higher yield attracts investment
- Rate cut: Currency typically weakens — lower yield drives capital elsewhere
- Hawkish tone: Even without a change, suggesting future hikes strengthens currency
- Dovish tone: Suggesting future cuts weakens currency
Trading Rate Decisions
(1) Check the calendar for the next central bank meeting. (2) Markets price in expectations — check what's expected. (3) If the decision matches expectations, minimal reaction. (4) If it surprises (hike when cut expected, or vice versa), expect 50-100 pip moves. (5) Trade the surprise — enter in the direction of the surprise after the initial spike settles.
Disclaimer: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 70-80% of retail investor accounts lose money when trading CFDs. Backtesting does not guarantee future results. Always consider whether you can afford the potential loss of your capital.