MONETARY POLICIES by Jarratt Davis


FX


Analysing Federal Reserve’s Rate Hikes


The Federal Reserve recently increased interest rates to 1%. Policymakers voted to hike the benchmark rate by 0.25%. As you know, monetary policy is what drives currency trading. In this article, we will help you understand the significance of Fed´s recent decision and the importance of future rates hikes.


Understanding Interest Rates


Before we look at the decision, it’s important to clarify some basics. Firstly, you need to understand that interest rate changes are vital to Forex traders. Why? Rate changes affect the value of a respective currency. We’ll


explore how this happens in a moment.


When a central bank alters its benchmark rate, it either acts to strengthen or weaken its currency over the long-term. In summary, an interest rate hike (or rise) strengthens a currency. Higher interest rates increase demand for a currency, namely in the


form of foreign direct investment. Remember, increased demand for any asset increases its value.


Lower interest rates have the opposite effect. In this scenario, foreign investors shiſt their capital to countries with higher rates. Doing this ensures they get a better return.


FX TRADER MAGAZINE April - June 2017 25


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