Academy · Recruit Briefing #7 · 6 min read

📈 Interest Rates

The lever every FX trader watches

🎯 By the end of this briefing, you'll be able to

Explain why interest rates move currencies
Distinguish the policy rate from market rates
Predict FX reaction to a rate decision or pricing shift

If you only learn one thing about FX, learn this: currencies follow yields. The pair that hikes more, faster, longer — its currency strengthens. The chain has exceptions and lags, but it's the spine of every macro trade.

Two kinds of rates

Policy rate: the rate the central bank charges banks. Fed Funds, BoE Bank Rate, ECB Deposit Rate. Set by committee, announced monthly. Market rates: what bonds yield in the open market — 2y, 10y, 30y. These price in *expectations* about future policy.

Why FX follows yields

If GBP pays 5% and USD pays 3%, foreign investors borrow USD cheap and lend GBP expensive — that's a 2% carry. The trade demand for GBP pushes its price up. Rate differential drives flows; flows drive FX.

🤔 Quick check

Fed pauses while ECB starts hiking. Likely EUR/USD direction?

📌 Recap

Policy rate = CB-set; market rates = market-priced expectations
FX follows the rate differential between currencies
Markets price the path, not just the current rate
Hawkish surprise → currency up; dovish surprise → currency down

🎯 Final Debrief

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