Discount rates when trading forex

Despite the fact that there is always a heated discussion around news trading about the effectiveness or ineffectiveness of this method, nevertheless, based on important key statistics, the majority of traders, as a rule, agree on the impact on the movement of quotes.
Yes, you as a trader can completely refuse trading on news, however, not paying attention to the publication of important strategic economic data is simply tantamount to suicide of your deposit.

It has also long been a proven fact that there are almost 100 percent news that have a huge impact on the Forex market, and discount rates are among them.

Discount rate. Impact on exchange rates

The discount rate, or most likely its change, is the most important tool in the hands of the head of the national bank, with the help of which the value of money is directly influenced. Actually, there is nothing complicated in the concept of the discount rate, because it means the initial interest rate at which the main central bank of each country lends funds to domestic banks. Thus, the central bank directly affects the cost of money, because by raising the discount rate, the amount of return of domestic banks to the central bank increases.

Also, in continuation of this chain, it is worth noting that banks, in order to recoup borrowed funds, increase their interest rates, which ultimately leads to an increase in the cost of a loan for an ordinary person.

A decrease in the interest rate, on the contrary, reduces the value of the money supply, so the cost of a loan for an ordinary person is an order of magnitude lower, since the intermediary bank will have to pay a smaller amount to the central bank.

After reading the paragraph above, you most likely have the opinion that an understatement of the interest rate is a good indicator for economic growth, and an overstatement, on the contrary, is a bad event. However, the first opinion is always deceptive, because it is necessary to continue the chain further, and not close it on an ordinary person receiving a loan from a bank.

The fact is that the core of any economy is the influx of investment. The discount rate is one of the most important indicators for every investor. Thus, a low discount rate leads to a low cost of money, and as a consequence, a decrease in payments on deposits.

Thus, it makes no sense for a large investor to keep funds for the country and invest in the economy, since very low interest rates on deposits are almost equal to inflation.

An increase in the interest rate leads to the cost of money growth, as well as at the same time to an increase in the percentage of additional payments by banks on deposits. As a rule, in countries where the interest rate is high, interest on payments to the depositor's deposit is high, so the economy is always oversaturated with money.

Therefore, when trading on the Forex market, a rise in interest rates is always seen as a positive phenomenon that leads to a rise in currencies, and a fall in interest rates is seen as a negative phenomenon that leads to a fall in currencies.

Features of using data on the discount rate on Forex

If you carefully study the impact of the discount rate over the historical period of different currency pairs, you will notice that the market reaction in certain situations is radically different. The fact is that the speeches of the heads of national banks or members of bodies responsible for monetary policy create certain beliefs on the part of investors.

So, for example, the head of the US Federal Reserve regularly gives speeches in which they indirectly refer to data on interest rates and its possible changes in one direction or another. Thus, often the forex market, having received certain signals about a change in the interest rate in one direction or another, begins to win back the situation a month before the publication itself, and at the time of the release of statistics on the interest rate, practically nothing happens.

The market is also highly volatile if a change in the discount rate occurs contrary to expectations or signals sent by the regulator. In such cases, the fluctuations are very strong and even lead to a change in the market trend.

Why do some currencies not respond to changes in the discount rate?

As a rule, the lack of reaction from the Forex market occurs on those currency pairs in which countries have a very high interest rate and strong inflation, and the change in the discount rate is insignificant. For example, if interest rate in Russia is 10 percent, then increasing or decreasing it by 0.5 percent will not bring practically any changes.

Judge for yourself, you won’t take out an apartment on credit at 10 or 10.5 percent, because in both the first and second cases the interest is still too high. If we talk about countries where inflation is at extremely low levels, then changes of a fraction of a percent will have a huge impact on the market.

In conclusion, I would like to note that the discount rate is one of the most important tools in the hands of the regulator, therefore its change is almost always reflected in the exchange rate of the national currency.