Interest rates

Interest rates represent the percentage charged by a lender to a borrower for assets, or paid to a depositor. Central banks, like the Federal Reserve or European Central Bank, adjust these rates to manage inflation and economic growth. Higher rates attract foreign capital, as investors seek better returns on deposits and bonds, increasing demand for the local currency.

For retail forex traders, interest rate differentials between two currencies drive carry trades, where one currency is borrowed at a low rate and another is lent at a high rate. These differentials also influence swap fees (rollover costs), which are charged or paid daily on open positions. Significant rate changes can cause currency volatility, affecting trade profitability and risk.