Interest Rate
Definition
Interest rates set by central banks are the primary driver of currency valuations in forex trading. Higher interest rates attract foreign capital seeking better returns, strengthening the domestic currency. Lower rates have the opposite effect. Central bank interest rate decisions and forward guidance are among the most impactful events for forex traders.
Related Terms
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More in: Fundamental Analysis
NFP (Non-Farm Payrolls)
Non-Farm Payrolls is a key US economic indicator released on the first Friday of each month by the Bureau of Labor Statistics. It reports the change in the number of employed people, excluding the farming sector. NFP releases cause significant volatility in forex, especially USD pairs. Traders often avoid opening positions before NFP or use the volatility for breakout strategies.
CPI (Consumer Price Index)
The Consumer Price Index measures the average change in prices paid by consumers for a basket of goods and services. It is the primary gauge of inflation and directly influences central bank monetary policy decisions. Higher-than-expected CPI readings typically strengthen the domestic currency as they increase the likelihood of interest rate hikes.
GDP (Gross Domestic Product)
Gross Domestic Product is the total monetary value of all goods and services produced within a country's borders during a specific period. It is the broadest measure of economic health and growth. GDP reports that exceed expectations generally strengthen the domestic currency, while disappointing figures weaken it. GDP is released quarterly in most countries.
Central Bank
A central bank is the monetary authority responsible for managing a country's currency, money supply, and interest rates. Major central banks include the Federal Reserve (USD), European Central Bank (EUR), Bank of Japan (JPY), and Bank of England (GBP). Their policy decisions, speeches, and meeting minutes are the most influential fundamental events in forex trading.
Inflation
Inflation is the rate at which the general price level of goods and services rises, eroding purchasing power. Moderate inflation (around 2%) is targeted by most central banks as healthy for economic growth. Higher inflation typically leads to interest rate hikes (bullish for currency), while low inflation or deflation may trigger rate cuts or quantitative easing (bearish for currency).
PMI (Purchasing Managers Index)
The Purchasing Managers Index is a survey-based economic indicator measuring business conditions in the manufacturing and services sectors. A PMI above 50 indicates economic expansion, while below 50 signals contraction. PMI data is released monthly and is one of the earliest indicators of economic health, making it closely watched by forex traders for its impact on currency values.
Trade Balance
The trade balance measures the difference between a country's exports and imports of goods and services. A trade surplus (exports exceed imports) is generally positive for the domestic currency as it indicates foreign demand. A trade deficit (imports exceed exports) can weaken the currency. Major commodity-exporting nations are particularly sensitive to trade balance data.
Monetary Policy
Monetary policy refers to the actions taken by a central bank to manage money supply and interest rates to achieve economic objectives like price stability and full employment. Hawkish policy (tightening) involves raising rates and reducing money supply, strengthening the currency. Dovish policy (easing) involves lowering rates and increasing money supply, typically weakening the currency.
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