Central Bank Interest Rates
The single biggest lever in macro markets
A central bank's benchmark interest rate (like the US Federal Reserve's federal funds rate) influences the cost of borrowing throughout an entire economy. Raising rates tends to cool spending/borrowing and strengthen the currency (higher yield attracts foreign capital); cutting rates tends to encourage borrowing/spending and can weaken the currency.
Why traders obsess over rate decisions
Interest rate differentials between two countries are one of the primary long-term drivers of currency pair direction — capital tends to flow toward the currency offering better risk-adjusted returns. This is why scheduled central bank meetings (like FOMC meetings for the US) are among the highest-volatility events on the economic calendar.
- Rate hike: generally currency-positive (all else equal) — higher yield attracts capital inflows.
- Rate cut: generally currency-negative (all else equal) — lower yield, less incentive to hold that currency.
- Markets react to the DECISION relative to EXPECTATIONS, not the decision in isolation — a hike that was already fully expected can cause little movement, or even a reversal.
- Forward guidance (what a central bank signals about future moves) often matters more than the current decision itself.
Pro Tip
"Buy the rumor, sell the news" is common around rate decisions: if a hike was heavily expected and priced in beforehand, the actual announcement can trigger a reversal rather than a continuation, because the real driver was the surprise (or lack of it) relative to what the market had already priced in.
Track real central bank moves on the Economic Calendar
A live TradingView economic calendar covers USD, EUR, GBP, JPY, AUD, CAD, CHF and CNY rate decisions and other high-impact releases.
Checkpoint Quiz
Checkpoint Quiz
Question 1 of 5All else equal, what does a central bank interest rate HIKE tend to do to that country's currency?