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Interest rates are a major driver of the forex market. The world of forex is actually ruled by global interest rates. This strong correlation makes forex traders keep a close eye on each country’s interest rate to forecast further moves in currencies.

Central bank and Inflation

A currency’s official interest rate is usually set by the Central Bank. They use interest rates as a tool to manage certain objectives:

● Managing the overall health and stability of the economy.

● Controlling inflation: While some inflation is necessary in an economy, too much can be highly damaging.

● In some cases, managing the foreign exchange rate

One of the biggest influences on a central bank’s interest rate decision is price stability or “inflation”.

Inflation is a steady increase in the prices of goods and services. Inflation is the reason why your parents or your parents’ parents paid a nickel for a soda pop in the 1920’s, but now people pay twenty times more for the same product. It’s generally accepted that moderate inflation comes with economic growth.

However, too much inflation can harm an economy and that’s why central banks are always keeping a watchful eye on inflation-related economic indicators, such as the CPI and PCE.

Interest Rates Expectations

Markets never sleep, constantly changing in anticipation of various events. Interest rates change as well. The majority of forex traders never concentrate on the current interest rates, trying to forecast in which direction interest rates are expected to