Interest Rates

The base interest rates at central banks can have a critical effect on our trading performance. In this table we've provided a comprehensive list of all the key base rates, relating to all the global central banks.

Should a rate change be announced by, for example, any of the four main central banks: the ECB, The Bank Of Japan, The Fed and the UK's Bank Of England, then the adjustment could dramatically effect the performance of a currency pair.

Example: Let's say that the Fed reveal a 0.25% rise in the USA interest rate, then theoretically the dollar will rise versus it's major and many of its minor peers. Investors will return to the dollar as it's judged to be delivering a better rate of investment interest.

In simple terms, if you're only receiving 0.5% interest in a savings account, then investing in dollars, in a USA based dollar savings vehicle with a 0.75% rate, is perceived to be more valuable and could prove to be more profitable investment.

There's also other considerations with regards to the base rates of central banks, for example, the opportunity to exploit what's termed "carry trade opportunities".
Acurrency carry trade is a strategy whereby an investor sells a certain currency, with a relatively low interest rate and uses the funds to purchase a different currency, which is yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates. This gap can often be substantial, depending on the level of leverage applied. We witness simple examples of the carry trade in our spot forex market constantly; if we think the dollar will rise versus the euro, then we'll short EUR/USD.

Irrespective of the short term gains that can be obtained as a central bank interest rate adjustment is applied, the longer term gains, by investors who are often considered to be "swing traders", or "position traders" are highly sensitive to base interest rate decisions by central banks. These type of specialist traders may only reverse or hold their longer term positions in various currency pairs, in relation to interest rate adjustments. They may place few trades per annum, and only trade when a central bank alters its interest rates.

This tool is accessible via our Traders Hub for FXCC account holders.