When it comes to forex markets, there’s one factor that trumps anything else. Many people may think economic indicators can greatly move markets. Of course, you’ll often see stories about wages, prices, etc. making a big impact.
Interest rates, however, play a major role in these market movements. Looking at it, a job report may have a big impact on FX currency pairs. But it has such an impact because of how the report can influence interest rates.
Central bankers meet almost once a month (depends on schedule from one central bank to another). The central bank’s monetary policymaking staff assesses the economy at such meetings.
Assessment requires wages, labor market, GDP growth, etc. As you can see, these economic indicators tend to influence decision-making.
Thus, while economic indicators might seem to have a big impact in one way, the reason behind this impact is how they can shift interest rate expectations.
Interest rates do have impact but how important are they in current times?
Of the 8 major currencies’ interest rates, 4 are identical, 2 are negative, one is zero and the highest is a quarter of a per cent. The maximum range between highest and lowest is 1%.
The answer to this is also covered in School of Pipsology. I have been a good boy. Differential interest rates cause huge movements of forward currency capital requirements, which causes market volatility, that makes PIPS go up and down, and that is what we are here to do - if PIPS don’t go up and down we do not have opportunity to make a profit.
At the moment with economies relatively isolated and each trying their hardest to recover from Covid19 crisis it will be important to know an eye on employment numbers because most Central Bank reports recently have highlighted that they want to see “full employment” before making any adjustments in policy.
That’s so true. High interest rate always attracts more capital and makes the exchange rate rise. Same goes for low interest rates, it causes the exchange rate to fall.