Interest Rate-Best Indicator?
Interest Rates are one of the most important things that every trader who trades currencies or any real trading instrument should follow. This is because on the whole scope of things interest rates actually do drive the markets.
Money Seeks Profit
Naturally, smart money is always looking for ways to multiply. Because of this simple reason, the big institutions and wealthy people will always keep their cash in the most profitable currencies. Which are, of course, the ones paying the highest interest. Interest is the reward for keeping money and inflation is the cost of keeping it. Therefore ceteris paribus, money will always go where the highest interest is paid. This is why when the interest of a currency is increased, there is an increase in its exchange rate as well.
Staying updated on the currency exchange rates is very important to traders as it always gives a picture of where the charts are going in the long run. Forex traders should always be up to date with the current interest rates offered by the central banks worldwide. This gives one a picture of the institutional bias in the markets.
Bank rates should be analyzed on a relative basis. It is not simply a matter of saying the pound is offering 5% and the US Dollar is offering 3% so I g in the markets and buy GU pair. It is rather a question of the current rate relative to the previous ones. You could actually get a sell bias on GU even if the rate of the pound is higher than that of the USD. This comes when for instance the interest rate of the pound has always been n 5% since way back and that of the dollar was at 1% then it rose to 3%. Even though it is less than the 5% on the pound it is still a strong bearish signal on the GU pair.
Macro vs Micro
Many people claim that they can trade changes in the interest rates on a 1-minute chart however the evidence is not that conclusive. What is conclusive however is the fact that interest rates control the macro perspective of things and one can be profitable trading the higher timeframes through interest rates.