Why are interest rates important

forexbrokerrebateprogram 2023/2/26 19:39:17 4Views

Interest forexrebatebests - relative to countries forex broker rebate program expectations of changes in autorebateforex forexbrokerrebateprogram - are the most important factor in forex trading All information about the impact of fundamental forex data on interest rates should be readily apparent More prec cashback forexely, you want to know the central bank of the currency How to look at various data types For example, in order to control inflation and increase employment, the US Federal Reserve has a dual mission so when we look at US data, we look at both the monthly non-farm payrolls report and the CPI On the other hand, the ECB does not have an employment mission In some countries, the unemployment rate can reach 30% and above as it did in 2012-2014 and we do not expect The ECB will respond to such serious problems Base Case Model At the most basic level, the traditional model of a free market economy holds that there is an optimal interest rate that promotes a balance between economic growth and inflation When economic growth is stagnant and prices do not rise much due to lack of demand, the central bank cuts interest rates to stimulate production for those who need to borrow and for those businesses that are cash rich, because low interest rates are beneficial to borrowers and also discourage cash hoarding If they can successfully drive economic growth, low interest rates can also push up inflation when growth rates are too high and the economy has excess capacity Interest rate cuts occur in two situations: slow economic growth accompanied by a large or widening output gap (excess capacity) low inflation We may ask why the ECB did not cut interest rates in the euro area when there was low growth and low inflation in 2012-1014 cut interest rates or take other stimulus measures (although the US and UK have mentioned stimulus measures)? The answer is because the ECB does not see ultra-low inflation (0.5-0.7% vs. the preferred target of 2%) as the prevailing trend at the time The ECB tends to view low interest rates as an anomaly that will be corrected - as history teaches us to worry Central banks raise rates when the economy shows the following states Economic growth is shrinking output Shortfalls (high capacity utilization) Rising inflation Rate hikes are designed to discourage manufacturers who need to borrow to continue production as well as reduce the purchasing power of industry and consumers If you owe an adjustable rate mortgage or credit card debt, rapidly rising interest rates will reduce your ability to purchase other products or services Many analysts would say that because of this pattern, the fundamental data we should follow include the housing markets health, consumer indebtedness, payroll and productivity growth, unemployment, commodity prices, and stock market prices (which heavily influence the wealth effect, where people holding portfolios with rising stock prices feel richer and thus put further assets into goods and services, including second homes) While it is possible to link these economic variables to central bank interest rate adjustments, in reality, central banks try hard not to get caught up in housing price The number of central bank policy committee members who worry that ultra-low interest rates will create a bubble is, after all, in the minority. In general, the goal of central banks is not to manage the existence of a market bubble; their goal is to manage monetary policy, and thus consumer behavior. The base case model does not involve any activity outside the borders of the central bank-managed country, and it works well as long as we can limit the flow of funds between borders through fixed exchange rates and exchange controls, but clearly, in a free market without capital controls - the only decades since 1980 -- foreign savers and investors will flock to countries with higher real interest rates You cannot infer by looking at raw interest rate differentials that money will always flow to the country with the highest interest rates Investors want the highest real interest rates, which means that inflation is over or has been subtracted from nominal rates for expected inflation; in addition, they want well-funded and liquid markets, trustworthy governments that will not freeze or confiscate funds, and as much choice as possible. Therefore, the true global investment rule may be to move money to the highest interest rates, but at the same time one should remain vigilant that returns must be real and the risk of loss must be low in order for a country and its currency to be in demand, investors not only want the highest rate of return, but they also want the central bank to take Therefore, not only the current interest rate differential is important, but also the expected interest rate differential for the next period. Each central bank has a short-term benchmark rate that sets the rate at which commercial banks borrow from the central bank or the overnight rate at which commercial banks borrow from other commercial banks The US uses the federal funds rate, while the Eurozone uses the repo rate This is the rate we look for when central banks announce policy changes Every forex trader should keep in mind the dates of important central bank meetings You can check the interest rates of major central banks on EarnForex.coms You can view the interest rate tables of the major central banks and the dates and values of the latest revisions to these rates on the EarnForex.com website The benchmark overnight rate is used as the basis for determining all other interest rates in the economy Usually, the longer the maturity of a loan/borrowing, the higher the rate will be compared to the benchmark rate When you calculate the longer-term (called term) rates, you start with the overnight term on the left and then draw a line through each term and reach the 20 or 30 year term This line is called the interest rate curve; it almost always slopes upward, which means that the longer the time, the greater the uncertainty of inflation. Which currencies will have higher 2-year rates and which will be preferred But you cant rush through the overnight rate or 10-year rate alone to determine which currency will have higher rates - you should also understand the overall interest rate curve and what to expect given what we know about the current tendencies of central banks (which could be tightening or easing monetary policy) Interest rate changes in FX are always a persistent puzzle, and the dollar may have an interest rate advantage at all points on the curve, but while the real interest rate differential rule suggests that it is the dollar that is rising, it is still the euro that is really rising We do not yet have a good answer to this puzzle, but one possible answer is that for foreign investors, the ECBs focus on inflation control is the gold standard of monetary policy management standard, and they are concerned that the U.S., which seeks economic growth and employment, will accept too high an inflation rate
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