Fed Interest Rate Decision is announced by the Federal Reserve. If inflation is the prime concern of the central monetary authority, interest rate is increased therefore bringing the exchange rates of USD up. If the Federal Reserve, on the contrary, is trying to kick-start the economy by decreasing the interest rate, the USD is getting weaker when compared to other national currencies.
Interest rates and exchange rates
It is important to follow interest rate decisions of the national central banks as they directly affect the exchange rates. The market will always react even to the slightest changes in the interest rates.
Interest rate and FX trading
Why interest rate is important? The answer lies in the nature of the FX trading itself. By investing in USD/JPY currency pair you are not simply buying dollars with the means of the Japanese Yen. You are investing into American economy by borrowing money from the Japanese one. By borrowing a currency with low interest rate and buying another currency with high interest the trader is earning by simply holding the currency pair in his portfolio. Interest rate differential can be used as a primarily or secondary source of income in Forex trading.
