Why Is Interest Rate Announcement Important For Forex Traders?

Why Is Interest Rate Announcement Important For Forex Traders?

The interest rate is one of the economic data that can move the market. In fact, it might be said that the interest rate announcement was actually the “popular” of the market. Probably the biggest factor in determining the value of a currency.

So, knowing how a country’s central bank sets monetary policy, such as interest rates, is an important thing you need to know.

One of the things that most influences the central bank’s interest rates is price stability, or “inflation”. Simply put, inflation can be translated as a constant increase in the prices of goods and services.

Simply put, inflation is the thing that causes the price of the goods we normally consume to increase from time to time. Five years ago you probably only needed IDR. 15,000 to buy a pack of cigarettes, but now you might have to spend at least IDR. 20,000 for the same cigarette.

Actually the rate of inflation that is not too high can be understood along with economic growth. But if the inflation rate becomes too high, the country’s economy may be disrupted. That is why the central bank always monitors various indicators related to inflation such as CPI and PPI.

Country Central Bank
United States of America The Federal Reserve System (The Fed)
Australia Reserve Bank of Australia (RBA)
English Bank of England (BoE)
Japan Bank of Japan (BOJ)
Canada Bank of Canada (BOC)
New Zealand Reserve Bank of New Zealand (RBNZ)
Switzerland Swiss National Bank (SNB)
European Union European Central Bank (ECB)

In an effort to keep the inflation rate at a “comfortable” number, the central banks usually set the benchmark interest rate. If interest rates are raised, inflation usually slows down, so does economic growth in general.

This happens because by applying a higher interest rate, it will usually reduce the interest of consumers and business people to apply for loan loans and on the contrary will increase interest in saving, so this will have an impact on economic activity.

Why do people become less likely to apply for credit? Because the cost (interest) for a loan will be higher, while interest for deposits becomes more attractive.

On the other hand, if interest rates are reduced or lowered, consumers and business people tend to apply for loan loans because the interest will be cheaper, so that it will encourage public spending and this will help economic growth.

So what does it have to do with the forex market?

So, here it is. The currency depends on interest rates because it determines the flow of funds globally, in and out of certain countries.Interest rates are one of the considerations of foreign investors to decide whether they will invest in the country or not.

Simply put this: if you are faced with the choice between saving at a bank that offers services / interest at 1%, while another bank offers 0.25% interest; Which bank did you choose?

Yes, you could indeed choose to save money under the mattress … but normally people will choose the first option: 1%, because 1 is clearly greater than 0.25.

Well, even in that currency applies things like that.

The higher the interest rate of a country, the greater the potential for the currency to strengthen. Conversely, the currency of a country that has a low interest rate will be vulnerable to weakening. Of course, this is not the only reason the currency strengthens or weakens, but interest rates are one of the things that can trigger a strengthening or weakening of certain currencies.

Simple right?

Fed Rate Increase Plan

Next Thursday (08/02/2018) at 01.00 WIB, or on Wednesday (08/01/2018) at 14.00 New York time, the Federal Reserve (Fed) will announce interest rates. It is estimated that the Fed will hold interest rates at 2 percent this time.

If we monitor the development of news related to the Fed interest rate, there is a chance of another interest rate increase twice this year. But it is still fresh in memory when the President of the United States (US), Donald Trump, in his interview with CNBC on July 19, 2018 said that he was worried that the strengthening of the USD would disrupt the US exports. He was also worried that the Fed would be too aggressive in raising interest rates which could hamper US economic growth.

The statement weakened the USD at the time, although later a White House spokesman gave “clarification” that the President would not intervene in Fed policy.

As already stated, this time the Fed is expected to hold interest rates at 2 percent. There is a possibility that the USD will weaken if the Fed’s interest rate stays at this rate, because market expectations are actually an interest rate increase at least twice more this year.

How are market opportunities?

In general, until now the USD is still in a strengthening trend for the long term despite corrections to respond to current market conditions and fundamentals.

Even if the Fed decides to hold interest rates this time, the weakening that occurs in the USD may only be a correction (for a long-term view ).

To take advantage of this, we are interested in USDJPY which in the mid-term view is moving in the support area. If what happens is a scenario of a weaker USD, then a break below 110.575 will most likely be followed by a downward movement with the potential target at the range 109.964-109.

Conversely, if it turns out that the USD does not weaken, a break above 111.564 will likely bring USDJPY up towards the 112.174-112.552 range.

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