Interest rates are one of the most important drivers of currency valuation. Every major move in forex markets, from long-term trends to short-term volatility, can often be traced back to interest rate expectations. Central banks use rates to control inflation and support economic stability, and traders react closely to these decisions.

When a central bank raises rates, its currency often appreciates. Higher rates attract foreign capital because investors seek better returns. Lower rates can weaken a currency as capital flows move elsewhere in search of yield. This simple relationship forms the foundation of many forex strategies.

However, markets move not only on actual rate decisions but also on expectations. Traders constantly analyze central bank speeches, inflation data, employment figures, and GDP numbers to predict future policy moves. If markets expect rate cuts and the central bank unexpectedly holds or raises rates, currency pairs can experience sharp reactions.

Interest rate differentials also influence long-term positioning. For example, when the Federal Reserve maintains higher interest rates than the European Central Bank, USD may perform stronger against EUR. This dynamic can create extended trends lasting months or even years.

Carry trading is another concept tied to interest rates. Traders borrow in currencies with low rates and invest in currencies with higher rates, earning the interest difference. Although attractive, these strategies carry risk during volatile or risk-off periods.

Understanding interest rates allows traders to better align their strategies with macroeconomic conditions. Following central bank updates and economic releases provides valuable insight into potential currency movements. Forex traders who stay informed through educational portals and market updates, such as those offered by Olympus Capital, can better position themselves around key rate-driven events.