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Money seeks higher yields. everyone wants to earn the most on their money, so traders go after currencies with higher yields.

How do you earn another country’s interest rate? You convert your currency into their currency. This is done by the selling of your currency in the foreign exchange market and buying that higher yielding currency.

We know that when traders sell a lot of any asset, the price falls lower. On the flipside, when traders buy a lot of any asset, the higher demand drives prices up.

When interest rates are rising, traders convert their currencies to that country’s currency, and drive that higher-yielding currency higher.

Inflation = Higher Interest Rates

So how do you know when a country is about to raise their interest rates? You look for countries with high inflation. Good central banks raise interest rates to tame inflation so it doesn’t get out of control.

There is a way to quantify and track inflation. It’s called the CPI (the Consumer Price Index). This is simply a “cost of living” index. It tracks the costs of things such as transportation, food and medical care. You can find out when governments will announce the CPI levels on economic calendars. You can find economic calendars on several sites on the internet.

As the CPI gets above the central banks target the central bankers hike rates to get inflation under control.

How To Tell What “Inflation”
Means to Central Bankers

You can go to a central bank’s site to find out what their target for inflation is. Also, many central banks’ target 2% year-over-year inflation. So if rates are rising above this level and the central bank expects it to continue, then the central bankers will raise rates.

On the other hand, central banks lower rates when the economy slows, employment falls, growth stalls. They lower rates to give the economy a “shot in the arm.” Usually, this is bad news for the currency because no one wants to earn less and less on their money.

If rates are expected to rise, in general, buy that currency. If rates are generally expected to fall, sell that country’s currency.