Excerpt from: Forex Training
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| April 23, 2008 | | Interest rates and forex trading | In currency trading, you might hear the term "interest rate differential." This is a forex trading term that refers to the differences between interest rates set by central banks that are in charge of setting policy for monetary systems.
In the United States, the Federal Reserve does this. The interest rate that influences the euro is set by the European Central Bank. The Bank of England, Bank of Japan and the Reserve Bank of Australia all perform this function as well.
The interest rate differential is the difference in interest rates. For example, with a US rate of 2.5% and a European rate of 4.0%, the differential is 1.5. The wider the differential, the more one currency is expeccted to gain above the other.
| Topic Tags: Bank of England, currency trading, euro forex trading, Federal Reserve, forex trading, forex trading term, interest rate differential, interest rates, monetary systems | |
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