Perhaps you have heard a lot of information about the Federal Reserve raising interest rates to combat global inflation. In fact, those who have been in the Forex market for a long time all know the Federal Reserve and the importance of the FED interest rate.
Some people jokingly say: traders will have nowhere to play finance if there is no FED!
So what is the FED? How will the FED interest rate affect the Forex market?
Before continuing the article about the FED, please read the article on how to be affected by psychological influence from the crowd. Because every information from the FED, many people will need to trade according to others unconsciously.
What is the FED?
In order to understand the impact of the FED interest rate on the Forex market worldwide, we need to know what the FED is.
The FED is the abbreviation for the Federal Reserve System, the central banking system of the United States. Specifically, the FED is the central bank of the US, established in 1913 to control the financial and monetary system of the country.
In addition, the structure within the FED organization will include:
The Board of Governors consists of 7 members
The Federal Open Market Committee (FOMC).
Federal Reserve Banks (12 banks) located in major cities
In addition, the FED plays an important role in regulating the money supply, interest rates and credit in the US to stabilise prices, economic growth and employment. Therefore, any change in monetary policy by the FED will strongly affect financial markets and foreign exchange. As a consequence, the FED can maintain a flexible, safe and stable monetary policy for the US.
That shows that information from the FED is extremely important in the Forex market, and traders will use the information from FED to build Forex trading strategies.
What is the Fed interest rate?
There is no doubt that the FED interest rate is the basic interest rate adjusted and announced by the Federal Reserve (FED). In short, the FED interest rate directly affects the interest rates of commercial banks and other credit institutions in the economy.
When the Federal Reserve interest rate is increased, the US dollar often appreciates against other currencies. Consequently, this factor will affect the value of risky assets such as stocks, bonds and commodities. Conversely, when the FED interest rate was cut, the US dollar often depreciates and the value of risky assets often increases. Therefore, forex and financial investors closely monitor Federal Reserve interest rate decisions.
On the other hand, the FED also adjusts the basic interest rate to stabilise prices, economic growth and employment. Whenever the Federal Reserve interest rate changes, investors closely monitor it to make appropriate investment decisions. The Federal Reserve interest rates indeed have a strong impact on financial markets, currencies and risky assets such as stocks, bonds, currencies, etc. Of course, to monitor such information, traders can easily follow the FED website, or Forex news channels as well as other Forex forums.
What should traders pay attention to when receiving information from Federal Reserve interest rates?
When the FED raises interest rates, the US dollar often appreciates against other currencies. This will reduce the value of risky assets such as stocks, bonds and commodities. Conversely, when the FED cuts interest rates, the US dollar often depreciates and the value of risky assets often increases. Therefore, traders should note that:
The value of their assets may be affected by changes in Federal Reserve interest rates.
They need to closely monitor Federal Reserve interest rate decisions to adjust their trading strategies in time.
Changes in Federal Reserve interest rates can affect the value of their trades and profits.
They need to carefully consider the impact of each Federal Reserve interest rate decision on the assets they hold.
Before the FED announces an interest rate change decision, Forex traders should:
Closely monitor inflation, GDP growth, financial markets and foreign exchange to predict interest rate changes.
Review their trading strategies and asset holdings to prepare for timely adjustments.
Follow Forex forums and analyst discussions to understand Federal Reserve interest rate decisions.
Carefully consider the impact of each interest rate decision on each type of asset.
By taking the above steps, a trader can not only analyse the market in a timely manner but also come up with a better trading plan. Therefore, they will maximize the opportunity and minimize the risk of the change in the Fed interest rate.
Follow the announcement of the Fed interest rate from Forex Factory
With the popularity of Forex Factory, most traders in the market trust to use and update the news on this website. In other words, the website will have the necessary features for traders and always provide full information about the market.
Not only that, traders will often receive announcements from the Fed on interest rates from this website. Because Forex news will be updated continuously and accurately from the Forex calendar. With the Forex calendar from Forex Factory, the US dollar will be turned red in the “impact” section as soon as the Fed announces the change of interest rates. Therefore, traders will quickly absorb information and change trading strategies accordingly.
Why does the FED interest rate need to increase or decrease?
Obviously, there are many factors around to FED interest rate that need to increase or decrease. Among them, maybe one of the most important factors is inflation. When inflation rises, the FED interest rate is often increased to control inflation and stabilise prices. In contrast, when inflation is low or declining, the Fed will lower interest rates to stimulate economic growth.
On the other hand, GDP growth, employment situation, credit growth and money supply are also important factors. When the economy develops strongly, GDP growth is high, employment is stable, and the Fed often increases interest rates to control inflation. Meanwhile, the FED interest rate tends to increase to stimulate the economy if growth slows down.
In addition, the international financial situation, financial markets and foreign exchange also affect the Federal Reserve's decisions. In the event of strong volatility in financial markets, the Federal Reserve usually keeps interest rates unchanged or decreases them to stabilize the market. Conversely, if the market tends to stabilize, the FED interest rate can only be increased.
When the Fed increases interest rates, commercial banks will also increase lending rates to maintain profit margins. This leads to the issue that borrowers will have to pay higher interest rates, increasing the cost of borrowing. On the other hand, when the Fed lowers interest rates, commercial banks will also lower lending rates accordingly to maintain profit margins. As a consequence, borrowers can comfortably repay interest at lower costs.
Impact of increasing FED interest rate on the foreign exchange market
It is undeniable that changes in the FED interest rate will have a significant impact on the Forex market. Specifically, when the FED interest rate increases, the US dollar will increase accordingly, and products priced in US dollars will become more valuable. At the same time, that factor will cause currencies and goods which have a connection to the US dollar will lose value.
In addition, increasing the FED interest rate higher will affect other countries. Because countries supported by the US will tend to face risks of capital inflows and outflows. In addition, international capital flows will flow more strongly into the US.
Besides, when the FED raises interest rates, USD will be a good haven for investors. Savings deposits will increase, the USD will strengthen against the EUR and this causes the EUR/USD Rate to plummet. At that time in the foreign exchange market, investors could only continuously Sell, Sell and Sell only. Therefore, there may be a trade war between European countries and the US.
On the other hand, a FED interest rate increase means that Federal Funds rates also increase accordingly. This means that banks also have to increase interest rates on customer deposits. Not only that, the US dollar will be stronger in the Forex market, as international funds flow into the US to seek higher interest rates. Overall, interest rate increases will bring many benefits to the US dollar.
The FED interest rate is always extremely important news in the Forex market. With a slight change in the FED interest rate, the Forex market will change quickly. However, depending on the Fed's statements, the Forex market will be affected differently. Therefore, traders should always monitor FED announcements and releases on interest rates to make reasonable Forex trading.