The recent outbreak of COVID-19 has changed the world. It has affected the USA and Europe the most, and many countries have decided to lower the interest rate as you know that interest rates of a country drive the forex exchange market. As many countries have agreed to reduce the interest rate to about 0%. It is the time that we should discuss how interest rate rules the world of forex trading.
Furthermore, each forex trader closely monitors it in every country to find the right time to place a trade. So, before you search for Meilleur Site de trading Canada 2020, it is best to understand its importance.
How It Affect Forex Trading?
As you know the monetary policy of the central bank determines the interest rate in the world. As the interest rate changes, a change in the currency follows. Moreover, the central bank use variety of tools to influence the difference in interest rates.
Central bank performs two tasks, which include maintenance of the stability of the exchange rate and the management of inflation. You also need to keep in mind that the exchange rate of a country estimates the economy. Whenever the economy of a country grows, the central bank increases the interest rates to induce inflation. On the other hand, when the economy of a country declines, the interest rate is decreasing to stimulate it.
Interest Rates and Economic Cycle
Whenever the economy grows of a country, the market earns more, and you can see positive growth in the GDP. It also indicates that there is an increase in the amount of expenditure which can result in inflation. The central bank has to control the growth of inflation and keep It on an appropriate level. It does so by increasing the interest rates.
When the economy of a country declines, it results in deflation in the market trends, which is not suitable for forex traders. At this time, the central bank steps in to decrease the interest rate to stimulate the spending and investments.
Interest Rate Expectations
As a trader, you should know that the interest rate changes according to the fiscal policies of the central bank. If the interest rate is decreasing, then you can expect a shift as well. There is always a sudden shift in the interest rate behind each gradual change. So, as a trader, you need to stay alert all the time to make a profit with your trades.
Interest Rate Differentials
Most of the traders use the popular trading technique to compare between two currencies and interest rates. It also determines whether the country is going to get strong or weak while trading. You also should know that the interest rate differential is the difference between the values of two interest rates. It can also help you calculate the shift in interest rates. Whenever the interest rate of both currencies moves in the opposite direction, there is always a big swing.
This information will help you understand the impact of interest rate on forex trading.