Interest rates are the primary tool central banks use to manage economic growth and inflation. They are the single most influential factor in forex markets.
Major Central Bank Rates
| Central Bank | Currency | Current Rate |
|---|---|---|
| Federal Reserve | USD | Check current |
| ECB | EUR | Check current |
| Bank of England | GBP | Check current |
| Bank of Japan | JPY | Check current |
| Reserve Bank of Australia | AUD | Check current |
How Rates Affect Currencies
Rate Hike → Currency Strengthens
- Higher returns on deposits
- Attracts foreign capital
- Signals economic confidence
Rate Cut → Currency Weakens
- Lower returns on deposits
- Capital outflows
- Stimulates borrowing/spending
Carry Trade
Traders exploit interest rate differences:
- Borrow low-rate currency (e.g., JPY at 0.1%)
- Invest in high-rate currency (e.g., AUD at 4.35%)
- Profit: ~4.25% annually +/− exchange rate changes
Key Points
- Rate decisions cause the biggest forex moves
- Forward guidance (future rate expectations) matters as much as actual rates
- Always check the economic calendar for rate decisions