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The biggest factor that drives the is changes made by any of the eight global. (' provides background on these.) These changes are an indirect response to other made throughout the month, and they possess the power to move the market immediately and with full force.

Because surprise rate changes often make the biggest impact on, understanding how to predict and react to these volatile moves can lead to quicker responses and higher levels. Interest Rate Basics Interest rates are crucial to on the for a fairly simple reason: the higher the, the more accrued on invested and the higher the profit.

(Read ' for background information.) Of course, the risk in this strategy is currency fluctuation, which can dramatically offset any interest-bearing rewards. While you may always want to buy currencies with higher interest (funding them with those of lower interest), that move is not always a wise decision. If trading on the forex market were this easy, it would be highly lucrative for anyone armed with this knowledge. (Read more about this type of strategy in '.' ) That isn't to say that interest rates are too confusing for the average – just that they should be viewed with a wary eye, like any of the regular news releases. (Read ' ' to learn more.) How Rates Are Calculated Each central bank's controls the of its country and the rate of interest at which banks can borrow from one another. The central banks will hike rates in order to curb inflation, and cut rates to encourage lending and inject money into the economy.

Typically, you can have a strong inkling of what the bank will decide by examining the most relevant economic indicators, namely: • The (CPI) • Consumer spending • • • (Read more about the CPI and other signposts of economic health in our tutorial. Binary options trading etrade. ) Predicting Central Bank Rates Armed with data from these indicators, a trader can practically put together an estimate for a rate change. Typically, as these indicators improve, the economy is going well and rates will either need to be raised or, if the improvement is small, stay the same. On the same note, significant drops in these indicators can mean a rate cut in order to encourage borrowing. (Read more about these factors in '.' ) Outside of economic indicators, it is possible to predict a rate decision by: • Watching for major announcements • Analyzing forecasts Major Announcements Major announcements from central bank heads tend to play a vital role in interest rate moves, but are often overlooked in response to economic indicators. That doesn't mean they are to be ignored. Any time a board of directors from any of the eight central banks is scheduled to talk publicly, it will usually give an insight into how the bank views inflation.

For example, on July 16, 2008, Chairman gave his monetary policy testimony before the House Committee. Whether it is possible to make money in forex. At a normal session, Bernanke reads a prepared statement about the U.S. Dollar's value, as well as answers questions from committee members.

At this session, he did the same. (Read more about the head of the Fed in '.' ) Bernanke, in his statement and answers, was adamant that the was in good shape and that the government was determined to stabilize it even though fears of a were influencing all other markets. The 10 A.M. session was widely followed by traders, and because it was positive, it was anticipated that the Federal Reserve would raise interest rates, which brought a short-term by the dollar in preparation for the next rate decision. Figure 1: The /USD declines in response to Fed 's monetary policy testimony Source: DailyFX The declined 44 points over the course of one hour (good for the U.S. Dollar), which would result in a $440 profit for traders who acted on the announcement. Forecast Analysis The second useful way to predict interest rate decisions is through analyzing predictions.

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Because interest rates moves are usually well anticipated, brokerages, banks and professional traders will already have a as to what the rate is. Traders should take four or five of these forecasts (which should be very close numerically) and average them in order to gain a more accurate prediction. When a Surprise Rate Occurs No matter how good your research is or how many numbers you have crunched before a rate decision is made, central banks can throw a curve ball and knock all predictions out of the park with a surprise rate hike or cut. When this happens, you should know which direction the market will move. If there is a rate hike, the currency will, which means that traders will be buying it. If there is a cut, traders will probably be selling it and buying currencies with higher interest rates. Once you have determined this: • Act quickly!