In an effort to keep inflation at a comfortable level, central banks will mostly likely increase interest rates, resulting in lower overall growth and slower inflation.

This occurs because setting high-interest rates normally force consumers and businesses to borrow less and save more, putting a damper on economic activity.

Foreign exchange market - Wikipedia

Loans just become more expensive while sitting on cash becomes more attractive. On the other hand, when interest rates are decreasing, consumers and businesses are more inclined to borrow because banks ease lending requirements , boosting retail and capital spending, thus helping the economy to grow. Well, currencies rely on interest rates because these dictate the flow of global capital into and out of a country. Currencies surrounded by lower interest rates are more likely to weaken over the longer term.

Markets are ever-changing with the anticipation of different events and situations. A shift in expectations is a signal that a shift in speculation will start, gaining more momentum as the interest rate change nears. While interest rates change with the gradual shift of monetary policy, market sentiment can also change rather suddenly from just a single report.

This causes interest rates to change in a more drastic fashion or even in the opposite direction as originally anticipated. So you better watch out!

Below is an example of one of many ways to monitor interest rate expectations and is one of the most-watched news releases. This spread can help you identify shifts in currencies that might not be obvious. An interest rate differential that increases helps to reinforce the higher-yielding currency, while a narrowing differential is positive for the lower-yielding currency.

An interest rate increase in one currency combined with the interest rate decrease of the other currency is a perfect equation for sharp swings! When people talk about interest rates, they are either referring to the nominal interest rate or the real interest rate.

The nominal interest rate is the rate of interest before adjustments for inflation. Argue for your limitations, and sure enough they are yours. We introduce people to the world of currency trading, and provide educational content to help them learn how to become profitable traders. We're also a community of traders that support each other on our daily trading journey.

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Reserve Bank of Australia RBA. Bank of Canada BOC. European Central Bank ECB. Bank of Japan BOJ.

Currency Interest Rates | OANDA

Reserve Bank of New Zealand RBNZ. Swiss National Bank SNB. Bank of England BOE.