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Forexintermediate

What moves currency prices?

Rates, inflation, growth, risk-on/risk-off.

TL;DR

Currencies move on the interest-rate differential between countries, plus inflation, growth, capital flows, and risk appetite. Central-bank policy is the single biggest driver.

Interest-rate differential

If US rates are 5% and EU rates are 3%, dollars yield more. Capital flows to USD, pushing EUR/USD down. Markets price the future rate path more than today's rates.

Real rates

Nominal rate − inflation = real rate. High real rates attract capital; negative real rates lose it. This is why CPI prints move FX so hard.

Other forces

Beyond rates, these matter.

  • →Economic growth — strong GDP/PMI supports the currency
  • →Trade balance — surplus countries earn currency demand
  • →Risk appetite — JPY/CHF strengthen in risk-off; AUD/NZD/EM in risk-on
  • →Capital flows — equity inflows force buyers to acquire the currency
  • →Central-bank intervention — Japan, Switzerland have intervened
  • →Political risk — affects EM most
Worked example

Fed hike vs ECB hold

Fed signals two more 25bp hikes. ECB says rates have peaked.

  1. 1Rate pathUS 5.50% → 6.00% projected vs EU 4.00% steady
  2. 2Spread widensFrom 150bp to 200bp
  3. 3Capital flowYield-seekers rotate into USD
  4. 4EUR/USD1.0900 → 1.0750 over 2 weeks (-1.4%)
Takeaway

FX trades the change in expectations. The actual hike is usually priced in — what moves the pair is what the dot plot implies for next.

Common mistakes

What to avoid

  • !Trading FX on the rate level instead of trajectory
  • !Ignoring inflation — high nominal with high inflation isn't bullish
  • !Treating JPY/CHF as 'just' carry currencies — they flip safe haven in stress
  • !Underweighting central-bank rhetoric between meetings
Self-check

Test yourself

Q1Why does a Fed hike usually strengthen the dollar?+

Higher US rates attract capital seeking yield; demand for USD increases.

Q2What's the difference between nominal and real rates?+

Nominal is the headline rate. Real is nominal minus inflation — the actual purchasing-power return.

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