Interest Rate Expectations.
Markets are ever-changing with the anticipation of different events and situations.
Interest rates do the same thing – they change – but they definitely don’t change as often.
Most forex traders don’t spend their time focused on current interest rates because the market has already “priced” them into the currency price.
What is more important is where interest rates are EXPECTED to go.
It’s also important to know that interest rates tend to shift in line with monetary policy, or with the end of monetary cycles.
If rates have been going lower and lower over some time, it’s almost inevitable that the opposite will happen.
Rates will have to increase at some point.
And you can count on the speculators to try to figure out when that will happen and by how much.
The market will tell them; that it’s the nature of the beast.
A shift in expectations is a signal that a shift in speculation will start, gaining more momentum as the interest rate change nears.
While interest rates change with the gradual shift of monetary policy, market sentiment can also change rather suddenly from just a single report.
This causes interest rates to change in a more drastic fashion or even in the opposite direction as originally anticipated.
So you better watch out!
Below is an example of one of many ways to monitor interest rate expectations and is one of the most-watched news releases.
The Federal Reserve’s “dot plot.”
The U.S. Central bank uses this signal as its outlook for the path of interest rates,
The Fed Dot Plot, which is published after each Fed meeting, shows the projections of the 16 members of the Federal Open Market Committee (the bigwigs in the Fed who are actually in charge of setting interest rates).
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