The term interest always has unique connotations on any type of financial activity. No matter if it is banking, mortgage or Forex, interest rates matter to anyone. In essence, the concept of interest is not hard to understand. It is the money that
you pay the person or company for using their money. However, in Forex, the meaning of interest is a little bit more different to understand. When it comes to traders or investors, the interest they are most concerned about would be the rate of the Federal Reserve funds. This is the amount in which banks are charged when they borrow money from the federal bank. This particular interest rate matters since the federal banks influences inflation.
If there is too much of a demand but very little supply, then there is inflation. Thus, the prices rise and so with the federal banks, since they can influence the cost of money to buy products, they can affect inflation rates. This is the same case with the central banks in other nations. One aspect traders have to understand is that even if the rates have been increased by the Feds, which does not immediately affect the market. What happens first is that banks will have to spend more to borrow money from Feds. Such could cause a series of market impact on both individuals and businesses. Indirectly, individuals who borrow money will have to suffer increased rates as well since banks have to recuperate. To simply put it: each action requires an equal reaction.
The stock market is also part of the industry affected by the rise and fall of Federal Reserve rates. When valuing a company, there are numerous factors to consider such as total future cash flow, present discounts, and number of shares. If the business is observed to be lacking in profit, due to reduced revenues or increased debt costs, then the future cash flow will fall. This will then lower the price of the stock. For most traders, it is not ideal to see currencies falling in value. They want to invest in money knowing they can generate more value from them. If the Forex is not rising, then owning such currencies may not be desirable and they might opt to sit it down or sell to avoid future losses.
Understanding interests could be a brilliant way to know how the future of the market can rise or fall and how Forex can also be affected by the current movements in the market.
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