Central Bank Rates are set by the central bank of a country. The Federal Reserve Bank is the central bank in the US while the European Central Bank has that responsiblity for the Euro Zone. These rates are set by the central banks as a target for banks to charge each other for overnight loans. So why are they important to FX traders? Central banks will raise these rates as the economy in their country starts to pick up to make sure they can stay a step ahead of any threat of inflation. So higher rates are a way of determining the strength of an economy. Higher rates can mean a stronger economy while lower rates can mean a weaker economy. A strong economy attracts investors from all over the world as stock markets tend to rise when the economy is strong, but before investing, the investor must exchange currencies. If they intend on investing in the US, they must first sell their currency and buy USD. That alone would strengthen the USD, but there is more. Higher interest rates also attracts fixed income investors. These are investors that would rather buy bonds that may be guaranteed by the government than invest in a stock market that they may find too risky. So higher interest rates attracts many different investors from all over the world, but they would all have to first buy the currency of the country they are investing in and that drives up the value of that currency. So the thought process is that higher interest rates usually leads to a higher currency value while lower interest rates usually leads to a lower currency value. DailyFX offers an easy way to compare the interest rates of the major currencies we trade here at FXCM. Here is the current table that you can find on the first page of DailyFX.
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