Interest rates are an FX trader’s best friend.

January 10, 2008   •   Don't Trade Like This

Once a new trader comes into one of our FX Power Courses they want to know the tricks of the trade. Many will ask if there is one thing that has a mystical power over the currency pairs and if they learn that, it will make them a better trader. Most are kidding, but imagine their surprise when I tell them that there is one…..interest rates. It is no secret that higher interest rates usually lead to a stronger currency while lower interest rates usually lead to a weaker currency. Need proof? Take a look at any currency pair that includes the USD and you will most likely see that the USD is the weaker of the two. This is the result of falling interest rates in the US and has been the major factor in the strong trends we have seen this year. The US FOMC has been the only major central bank that has been lowering interest rates….until now. This last week we saw the Bank of Canada lower rates and there is talk of the Bank of England thinking of doing the same this week. This is one of the reasons for the recent USD strength. The question now is if this is enough to cause a major trend change. We won’t know the answer to that until after the fact, but in the meantime, stay tuned to dailyfx.com for their insight into this story.

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