How Interest Rates Shape Forex Movements Interest rates are one of the most influential factors in forex trading. Central banks, like the Federal Reserve or the European Central Bank, adjust interest rates to control inflation and stabilize the economy. These decisions directly impact currency values. When a country raises interest rates, its currency typically strengthens. Why? Higher rates offer better returns on investments denominated in that currency, attracting foreign capital. Conversely, lower rates often weaken a currency as investors seek better yields elsewhere. Forex traders closely monitor central bank meetings, economic indicators, and inflation data to anticipate rate changes. Even the hint of a possible hike or cut can move markets significantly. The carry trade — borrowing in a low-interest currency to invest in a high-interest one — also thrives on rate differentials. To trade effectively, understanding the relationship between interest rates and forex is essential. It not only influences long-term trends but also fuels short-term volatility. #CommunityAMA