FOREX THEORY
Why Interest Rates Matter
for Forex Traders (Part 4)
Interest Rate Expectations
Markets are ever-changing
with the anticipation of different events and situations. Interest rates do the
same thing – they change – but they definitely don’t change as often.
Most forex traders don’t
spend their time focused on current interest rates because the market has
already “priced” them into the currency price. What is more important is where
interest rates are EXPECTED to go.
It’s also important to know
that interest rates tend to shift in line with monetary policy, or more
specifically, with the end of monetary cycles.
If rates have been going
lower and lower over a period a time, it’s almost inevitable that the opposite
will happen.
Rates will have to increase
at some point.
And you can count on the speculators
to try to figure out when that will happen and by how much.
The market will tell them;
it’s the nature of the beast. A shift in expectations is a signal that a shift
in speculation will start, gaining more momentum as the interest rate change
nears.
While interest rates change
with the gradual shift of monetary policy, market sentiment can also change
rather suddenly from just a single report.
This causes interest rates
to change in a more drastic fashion or even in the opposite direction as originally
anticipated.
So you better watch out!
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