What are Interest Rates in Forex?
Interest Rate
Forex Trading Glossary
Quick Answer: Interest rates are the cost of borrowing money, set by central banks. Higher rates attract foreign investment, strengthening the currency. Rate differentials drive carry trades.
What Are Interest Rates?
Interest rates represent the cost of borrowing money or the reward for lending capital. In forex they drive yield differentials that guide currency flows.
Types of Rates
- Policy rate: Set by the central bank to influence economic activity.
- Market rates: Longer dated yields such as government bonds that reflect expectations for growth and inflation.
- Real rates: Nominal rates minus inflation expectations, a key driver of currency attractiveness.
Why Rates Matter
When rate expectations rise, investors seek currencies with higher yields. Falling expectations usually weaken those currencies as capital looks elsewhere.
Monitoring Rates
- Watch short term instruments like overnight index swaps to track policy expectations.
- Compare yield spreads between two countries to evaluate relative strength.
- Map key events such as policy meetings or inflation releases that can move rate forecasts.
- Blend rate analysis with technical structure to time entries and exits.
Related Terms
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