Why Interest Rates Matter to Forex Traders


Share This Post

Share on facebook
Share on twitter
Share on email
Why Does FOMC Matter to Forex Traders

FOMC stands for Federal Open Market Committee, which is a branch of the Federal reserve of banks. The role of the FOMC is to analyze the US economy, which is one of the biggest economies, and make projections about the key indicators that measure economic health like interest rates and monetary policy. The Fed’s interest rate decision really does have an impact on the US economy and even the global economy. That does, however, have a considerable – and immediate – impact on financial markets such as currencies, equities, bonds, and even commodities. These meetings are held almost eight times a year. The data, summary of projections, and solutions of the FOMC play huge role in setting the sentiment of traders. This is because the release of this data has both short and long-term effects on price volatility and direction, the two concepts every trader wants to get right and turn into tradeable opportunities. The FOMC aims to ensure economic stability instead of the popular take of ensuring economic growth, this is achieved by lowering and increasing interest rates based on the economic performance data to manage the inflation rate.

What Is The Interest Rates and Their Effect On The Market

In simple terms, more interest means more monetary reward and less interest means low monetary reward. If the FOMC data analysis says the economy has been experiencing rapid growth, it will increase interest rates. This is such that borrowed money, loans, has high interest, money in savings gains more interest. This will result in general consumers not borrowing money, and not wanting to use their money in savings. The ultimate goal is to decrease the exchange or movement of money by more spending, this less circulation of money thus results in a decrease in economic growth. The opposite of decreasing interest rates will occur when the economy is going through a rough patch in order to stimulate growth, and inflation rate refers to the continual increase in prices of products. This occurs in relation to interest rates. If money flows easily in the economy it means interests are low and spending is more than demand for products is more which drives prices high.

How To Trade The FOMC

The key now is how you can start making the most out of this meeting and implement it all into your trading strategy or plan. The very first approach will be to evaluate what is at risk in the meeting and what possibilities can be calculated on the basis of it since the FOMC’s decision could have a direct influence on specific trading instruments. We have therefore combined most of this information to assist in making a strategic vision, and how you can turn the data into tradeable opportunities. The dollar is the king is making forecasting future price moves following the release of the statement. For example, If interest rates increase, the demand for the dollar will increase. Therefore, applying the statement above on Gold that if the dollar is strong as a result of higher interest rates, gold’s value may fall, and we may see more bearish market activities a few hours later. The news calendar can help you track the numbers. For example, when reading the forexfactory news calendar, A Fed rate hike occurs when the actual figure is higher than the prior or predicted figure. The US dollar will usually rise on this occasion, depending on what the market has already forecasted. On the other hand, a Fed rate cut occurs when the actual number is lower than the previous or predicted number. The US dollar will normally fall in this case – again, depending on what has happened. The key in this context is understanding the numbers after the release.

Subscribe To Our Newsletter

Get updates and learn from the best