Mon 3 Apr 2006
How major key interest rates affect foreign currency exchange market?
You can simply understand that if you will look on the currency from the outsider’s point of view. Imagine, week later Federal Reserve Board planning to rise interest rates by 0.5% and, in the same time European Central Bank will keep interest rates in the Eurozone unchanged.
What does it mean with respect to normal investor in Japan for example? He is sitting and planning where to invest his money and he is definetely looking for international opportunity. What would you do? Right - in the present market condition US dollar look more prospective compare to euro, because more interest will be paid on US dollars. It really does not matter, what exactly that international investor planning to buy - equites, bonds or a nice house. Profitability will be bigger in the USA and not in the Eurozone. All above mentioned will increase crossrates USD/Euro and make USD stronger compare to Euro.
Please pay attention - we said : ”week later Federal Reserve Board planning …” This is another trick of the market, either Forex or Equity stock market. It is called “market expectations“. Actually, at very this moment this future changes in the interest rates are already represented in the crossrate USD/Euro. Yeap, market is a strange thing.
Why should you wait those decisions, if this future situation is in the price, and nothing will change over a week time? It is not entirely true. First of all, there are always some doubts, and after decision about key interest rates will be announced, some changes will affect the market too, anyway. Changes in the crossrates will be much more, if the decision of the central bank’s comitees misses market expectations. For example, key rates will keep unchanged or will be changed more than expected.
You don’t want to miss this opportunity to get some profit and you should be online on the Forex market at that moment.