Central bank interest rate decisions are one of the most influential factors in the forex market. When a central bank raises interest rates, it generally makes that country’s currency more attractive to investors. Higher rates increase returns on deposits and bonds denominated in that currency, leading to capital inflows and strengthening the exchange rate. Conversely, when a central bank lowers rates, yields fall, and investors may shift capital to other markets offering better returns, often causing the currency to weaken.

Forex traders closely monitor interest rate announcements and policy statements because they often trigger immediate market volatility. Even if a central bank leaves rates unchanged, hints about future monetary policy, known as forward guidance, can move currency pairs significantly. For example, speculation about rate hikes can push a currency higher before the decision is officially made.

Interest rate differentials between two countries also drive forex movements. A currency with higher interest rates compared to another often gains against it, as seen in carry trades where investors borrow in low-yielding currencies to invest in higher-yielding ones.

Overall, central bank rate decisions shape investor expectations, influence capital flows, and create trading opportunities. Understanding these dynamics helps forex participants anticipate currency moves and manage risk effectively.