The Central Bank is the most important institution that is responsible for ensuring the stability of prices in a country. Countries use a wide range of tools to obtain positive development in their economic structures and to maintain their overall level of stability. Perhaps the most important tool is the power to change interest rates. Central banks can increase or decrease the money demand in the market by changing interest rates. The supply of money influences its value, regardless of which direction it varies. To rebalance the balance of the supply-demand, which is the general theory of the economy, the prices need to move. To reform the balance in the demand-supply scale which is the general theory of economy, the prices must move.
Forex markets as we know as a pair of parity of a country’s money to the other country trade through the ratio of the currency. The change of a country’s currency may change the direction of the graph significantly.
So, what happens if interest rates change?
When the Central Bank raises the interest rate, investors start to withdraw money from other different liquid sources and demand the money of the country. It is more attractive to deposit money with their own country’s currency. While this change between investment resources affects many parameters, the value of money, which is the main subject, will increase because of the demand. As real and legal people turn to deposit accounts to make a profit, they turn money to other resources and start investing in banks. Unquestionably, the value of the currency of increasing demand starts to increase in this respect. Likewise, when the interest rate decreases, the value of money will decrease.
If you intend to follow the Fundamental Analysis methods, one of the most essential keys to reduce your investment risk might be to monitor changes in interest rates on countries. Being aware of the fact that the value of money will decrease when interest rates increase will give you convenience and advantage if you follow the economies of the country. If the currency pair is the base currency pair (for example, the USD / EUR parity is USD), the decrease of the interest rates in the USA may cause the price graph to trigger to go down.