Forex interest rates play the most important role in moving the prices of currencies in the Forex market. Central banks are the most influential actors as international interest rates are set by these financial institutions. Forex interest rates dictate flows of investment. Since currencies are the representations of a country’s economy, differences in interest rates affect the relative worth of currencies in relation to one another.
Although it doesn't happen often or without warning, when central banks change forex interest rates they cause the forex market to experience movement and volatility. In the realm of Forex trading, accurate speculation of central banks’ actions can enhance the trader's chances for a successful trade.
How to use this
The most common form of using Forex interest rates to a trader's advantage is a process known as the Forex swap. The Forex swap is when a Forex broker and a trader trade one currency for another at an agreed rate and then convert those currencies back at a selected date in the future at the previously agreed exchange rate. So, as a Forex trader you're making two transactions. The first being made now, and the second being made in the future.
In a Forex swap, the broker makes his money set by the difference in the Forex interest rates of the two selected currencies. The interest which you can earn during the Forex swap period is used by the broker to calculate the price.
Whenever a central bank from a country changes its Forex interest rates, it's going to have an effect on the pairs you are trading. Whether it is an outright trade, or a Forex swap, the market is going to react immediately. Generally speaking, when a central bank has a scheduled announcement concerning its Forex interest rates, it is best to hold off trading in that currency; unless of course you feel lucky. But oftentimes that's exactly what it is; luck.
As far the Forex swap goes, it's hedging. It's done all the time in every market and the Forex market is no different. The complexity of this form of hedging as compared to straight out trading on the software provided by your Forex broker is the reason why it is not recommended for the novice. The knowledge of Forex interest rates is a necessity to achieving success in this realm.
However, once you are experienced and educated in the Forex market, it is a useful system and even with the costs involved can prove to be profitable. There are various forms of swaps in all the financial markets and some of them overlap with the Forex market.
Look it up
Like everything else, there is a wealth of information available on Forex interest rates on the Internet, and before diving into it, the Forex trader should do his best to become familiar with the ins and outs of the process. There are forums where traders with experience will share their knowledge and it's worth it to join in and even ask questions.