This may sound obvious, but the US federal interest rate has had a huge impact on the foreign exchange market, especially when it changes these rates. The changes in US federal interest rates can fully drive the foreign exchange market as they are a direct or indirect response to other alternative economic indicators. Interest rate changes can also be unexpected and have a significant impact on traders, so traders must know how to predict and respond to these changes.

Fundamentals of the US Federal Interest Rate

Foreign exchange traders believe that the US federal interest rate is very important. Currency fluctuations are likely to be a significant offsetting of any foreign exchange trading strategy through any possible changes. Although you may always tend to purchase currencies with higher interest rates - funding them with currencies with lower interest rates - this is not always a wise move. The foreign exchange market is not that easy, especially when you include changes in the US federal interest rate in the equation. Now, this is not to say that interest rates are too complex for ordinary foreign exchange traders, but traders should be cautious. Look at interest rates with caution, just like any other regular press release that appears this month.

For example, in the autumn of 2017, the Federal Reserve called for a 0.25% to 1.50% increase in its federal interest rate range target from 1.25%. After the release, the pound/dollar shifted towards 1.3355, while the euro/dollar trend was similar to 1.1757, with the dollar weakening. This transformation tells the story; No foreign exchange trader should ignore the US federal interest rate.

How to calculate the US federal interest rate

The monetary policy of a country and the short-term interest rates at which banks can borrow from each other are controlled by the central bank. This also applies to the US federal interest rate. Global central banks will encourage lending by raising or lowering interest rates to curb inflation. By reviewing the most relevant economic indicators, you can have a vague concept of what banks choose, such as:

-Consumer Price Index (CPI)

-Consumer expenditure

-Employment level

-Housing market performance

Leading changes in US federal interest rates

By arming yourself with the data from the above indicators, as a trader, you can estimate how the US federal interest rate will change. With the improvement of indicators, the economy is also improving, and traders can estimate that interest rates will increase or remain unchanged. However, the decline in the above indicators may indicate a rate cut and may indicate that traders need to pay attention to warnings.

You can also predict interest rate decisions by paying attention to major announcements and analyzing market forecasts. Significant announcements are likely to play an important role in interest rate changes, but as long-term market indicators, they are often underestimated. Whenever there is a public discussion, including the Federal Reserve, it is common to gain a deeper understanding of how the bank currently views inflation. When these things do happen, if you value your efforts in foreign exchange, then listening to what is said is definitely meaningful.

Analytic predictions and estimates will always be useful, as brokers, professional traders, and banks typically predict interest rates well. A good strategy is to adopt four to five predictions, all of which should have similar results, and average them to accurately estimate the future situation.

How to trade US federal interest rates

It is important to note that whether you have conducted research or have analyzed data, the Federal Reserve can always throw a curve ball through unexpected interest rate hikes or cuts. If this situation occurs, you should understand how the market will develop. For example, if interest rates are raised, the currency will appreciate and traders will purchase the currency. On the contrary, if interest rates are lowered, traders are more likely to sell and instead purchase currencies with higher interest rates.

Quick action is crucial at this point. When unexpected interest rate changes occur, the market will move rapidly at an astonishing speed, as all traders hope to stay ahead of the crowd. Beware of volatile reversals; The views of traders will dominate the market in a short period of time, and then logic will intervene, making the trend more likely to continue. After determining whether there have been unexpected interest rate changes, you need to carefully read the actual press release of the Federal Reserve to understand how the central bank views future interest rate decisions.

By following economic news and events, in addition to analyzing how the Federal Reserve acts, foreign exchange traders can also grasp monetary policy and how currency exchange rates will change. With changes in currency exchange rates, traders can maximize profits by responding to fluctuations in market performance. Preparing for unexpected changes in the US federal interest rate and responding to unavoidable interest rates is the best tool in a trader's toolbox.