Interest rates and inflation - the two main indicators on market

These are some of the fundamental factors with the greatest impact on currency trading. The interest rate and inflation are directly related. For each country, the interest rate is different and is determined by a specific financial control body. For Europe, this is the ECB (European Central Bank), the European Central Bank, the United States is the FED, the Federal Reserve, Japan is the Bank of Japan, the Bank of England (BoE), for Switzerland is the Swiss National Bank (SNB) - the Swiss National Bank, and so on.

If a central bank of a country reduces the interest rate, it means that the interest on the loans will also decrease. the cost of credit will be lower. This measure will result in more withdrawn credits, more cash in circulation and, respectively, higher consumption. At the same time, the bigger and cheaper money supply will lead to a depreciation of the national currency relative to other currencies. From here, we can conclude that a country's interest rate depreciation has a negative effect on its national currency (lowering its value).

Similarly, at a high interest rate, money supply decreases, money in circulation is also less, people prefer to keep their free money in a bank to earn interest. It follows that interest rate increases positively affect the given national currency. From what has been said, the question arises as to what should be the ratio between interest and inflation in a given country in order to maintain its national currency and economy stable.

Let us assume that somewhere in the world, in some country, inflation is greater than interest, then in practice there will be no point in keeping one's money in a bank because they will depreciate faster than if they spend it immediately and buy with them commodity. This option would be detrimental to the country's economy. The same, but at a slower pace, would also occur if interest rates and inflation rates were equal. This would again lead to cash surpluses and would negatively affect the national currency of the state.
The ideal option for a country's economy would be if the interest rate exceeds a small percentage of inflation.

%interest rate > %inflation

This option is most favorable to a country's national currency. Interest rates on long-term government securities also have a major impact on foreign exchange rates. The rise in government bond yields positively affects the currency of a given country and vice versa - the lowering of interest on government securities has a negative effect on the currency.

We will look at an example. If interest on government securities rose in the United States while interest on government securities in Japan remained unchanged, investors would be encouraged instead of buying Japanese government securities to invest their money in US government securities. Such a change in the government bond interest rate would have a positive impact on the US economy and the US dollar because more people will want to invest in the US, but to invest, they must first buy US dollars, which in turn will raise the demand for the American currency, and hence the value of the dollar.

Total economic factors.

Total economic factors are many and varied. In practice, it is any economic factor that affects in any way, whether directly or indirectly, the state of the currency of a country.

Indeed, Gross Domestic Product (GDP) is one of the most important common economic factors.

GDP = C + I + G + T

GDP-Gross Domestic Product (GDP)
C- Consumption
I-Investments
G-Government Expense (government expenditure)
T-Trade Balance (trade balance)

The trade balance is equal to the difference between exports and imports in one country.

T = Export - Import

The rise in the GDP of a country has a positive impact on its national currency. Greater GDP means greater output, greater consumption, greater capital movements, greater investor interest, and hence greater demand for national currency. This would strengthen the position of the country's national currency against the currencies of other countries.
Similarly, the GDP decline would negatively affect the currency of that country.
Other general economic factors are:

-employment unemployment
-profitability
- Consumer Price Index (CPI)
-Product Price Index (PPI)
-consumption inclination
-Nonfarm Payrolls
-housing construction and others.

Any change in the above-mentioned indices and parameters affects different exchange rate weights. Accordingly, if the change is positive - it affects positively

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