ForexGen |Keeps Spreads Tight

Financial factors are vital to fundamental analysis. Changes in a government's monetary or fiscal

policies are bound to generate changes in the economy, and these will be reflected in the

exchange rates. Financial factors should be triggered only by economic factors. When

governments focus on different aspects of the economy or have additional international

responsibilities, financial factors may have priority over economic factors. This was painfully true

in the case of the European Monetary System (EMS) in the early 1990s. The realities of the

marketplace revealed the underlying artificiality of this approach.

The role of interest rates. Using the interest rates independently from the real economic

environment translated into a very expensive strategy. Because foreign exchange, by definition,

consists of simultaneous transactions in two currencies, then it follows that the market must focus

on two respective interest rates as well. This is the interest rate differential, a basic factor in the

markets. Traders react when the interest rate differential changes, not simply when the interest

rates themselves change. For example, if all the G-5 countries decided to simultaneously lower

their interest rates by 0.5 percent, the move would be neutral for foreign exchange, because the

interest rate differentials would also be neutral. Of course, most of the time the discount rates are

cut unilaterally, a move that generates changes in both the interest differential and the exchange

rate. Traders approach the interest rates like any other factor, trading on expectations and facts.

For example, if rumor says that a discount rate will be cut, the respective currency will be sold

before the fact. Once the cut occurs, it is quite possible that the currency will be bought back, or

the other way around. An unexpected change in interest rates is likely to trigger a sharp currency

move

By registering on ForexGen, you create your ForexGen profile and you can go ahead and open as
many Demo accounts , and Live accounts as you need. All accounts can be created online and
managed under your ForexGen profile. You can mix between Mini, Standard, Pro, Premium and
No Dealing Desk accounts in one Profile. Instant Approval.