A forex interest rate trading strategy is a great way for investors to incorporate an important aspect of trading into their day to day strategy. Investors will usually buy into currencies with high interest rates and sell off their investments when interest rates lower.
For instance, everyone has heard of the Federal Reserve. When an anouncement is made that the fed will cut the interest rates there is usually a quick sell off of USD currencies within the foreign exchange market. When an announcement is made about the fed raising its rates, forex investors will buy into the USD currencies.
For the most part, when these types of announcements happen, the trades have to be quick to see a significant profit. The markets tend to level off or come back to "normal" fairly quickly after an announcement has been made.
Does this happen all the time? No. Sometimes a significant change does not happen to some of the currency pairs or maybe the total opposite happens for some reason. A lot of factors may come into play as to why this happens including the interest rates and other economic factors of the other currency it is paired with.
The interest rate influence on the forex market holds true for the other world currency markets not just the United States Federal Reserve currency the dollar. Obvioulsy since the U.S has the world's largest economy the dollar is highly regarded as the top currency. Their are a total of 8 major central bank currencies around the world whose announcements in regards to interest rates will influence a forex interest rate trading strategy for anyone investing in them.
These 8 include:
How will a long term forex interest rate trading strategy play out? I thought I would share some facts with you of the USD/EUR currency pair using the 5 year chart along with the interest rates chart for the Euro and US Dollar.
Below is a 5 year chart of the EUR/USD currency pair.
From the chart you can see EUR/USD has a 5 year low of 1.03389 on January 1 2017 and 5 year high of 1.25543 on February 11 2018 with screen shots below.
Here is the chart of the federal reserve 5 year interest rate during the same 5 year time frame of the EUR/USD currency pair.
And the 5 year chart of the Euro interest rate during the same time frame.
The charts do not seem to care about the interest rates for the dollar and euro for the long term. 2015 to present the interest rates were very low or for the most part at 0 percent for the Euro. From 2015 to present the interest rates for the federal reserve steady rose from near 0% in 2015 until its peak in 2019 at 2.5%. As the interest rates for the fed steady rose and the euro interest rate remained at 0 during the same time from 2018 - 2019 the EUR/USD pair took a sharp decline. Usually when the fed rates rise people buy into the currency because it means the dollar is strong. However during this time it took a sharp decline which is the total opposite and for quite a long time. So something else made the decline happen.
I am thinking the decline had to do with a more technical analysis of the charts and price action instead of economical. Sometimes during the short term other aspects of the economy can impact the charts in a negative way like the job reports, or housing while the interest rates have a positive outlook. Since the interest rates were steady rising for so long I interpret it as the economy being good for that long which means jobs and housing was good for the most part for the long term. A thorough technical analysis of the charts along with checking out the historical data and news will provide some better insight as to what is going on with the charts for this length of time.
A forex interest rate trading strategy is not the only forex trading strategy available. Many fx trading strategies exist however you do not have to learn them all to be successful. Take a look at the advanced forex trading strategies PDF for some more unique and interesting fx trade strategies called the hammer and inverted hammer. The free forex PDF will give detailed insight into these two advanced fx strategies, how to identify them on the chart, where to enter and exit the trade, and the importance of identifying the support and resistence zones.