Blog 27: US Federal Interest Rate Decisions: What It Means for Forex Markets Introduction The forex market and the related currency values are determined by a number of key factors. While all of these factors carry importance, there is one that stands taller than the rest, with that being interest rates. Such rates are arguably what drive the forex market, as the eight central banks have a huge hold over how the market functions and moves forward. The interest rates linked to all of these central markets generally shift as an indirect response to other economic indicators that occur throughout the month. Making it clear, largely because of how tumultuous they can be, interest rates have the power to move the market in both directions at full …show more content…
Making it as clear as possible, it is the interest rate that credit unions and banks lend reserve balances to alternative institutions on an overnight basis. Such reserve balances are held at the famed US Federal Reserve to ensure institutions' reserve requirements. Institutions that have excess balances in their accounts offer up those balances to other institutions that are in need of a larger balance. The US federal funds rate is considered to be a pivotal benchmark within most financial markets, hence its importance on a global economic …show more content…
This can in turn alter the course of the forex market, thus is something that investors must brace themselves for. When a change in the US federal interest rate does come around, specifically in the form of a hike, you can certainly expect it to shift the price of the USD. However, seldom will it be a case of all hands to the pump, as past incidents show that the USD is a fairly battle-tested currency on the grand scheme of things. For that reason there is usually a 12-month lag in effect, where the impact of the US federal interest rate change is steadily felt. When the US federal interest rate is increased you will need to look at the bigger picture and avoid making any snap