Interest rates are the gravity of the currency world. Central banks set them, and the expectations around them drive the largest and most durable currency trends.
Why rates move currencies
Higher interest rates tend to attract capital seeking yield, increasing demand for a currency; lower rates do the opposite. But it's the direction and expectations of policy — hiking, holding, or cutting — that matter more than the current level.
The major central banks
The Federal Reserve (USD), ECB (EUR), Bank of England (GBP), Bank of Japan (JPY) and others steer their currencies through policy. Their statements, meeting minutes and officials' speeches are studied for clues about the next move.
Trading the expectation
Markets move ahead of decisions as expectations shift. By the time a hike is announced it's often 'priced in', and the currency may even fall on the news if the tone disappoints. Following the narrative of expected policy is more useful than reacting to the announcement alone.
Key takeaways
- Higher/rising rates attract capital; policy direction matters more than level.
- The Fed, ECB, BoE and BoJ steer their currencies via rate policy.
- Markets price expectations ahead — the surprise vs expectation moves price.