Interest is a term used in debt or owing the amount from a person, Bank or a Financing company, when we take finance from any bank, a company or from a person certain percentage is charged against that amount, that percentage is known as interest.
Inflation is meant an increase in the price and decrease in the value of the currency, as we were able to buy more EUR with USD, now because of Inflation, the prices are increased so we can buy less EUR with the same amount of USD.
Example:
In the first quarter of 2019, the USD was in good condition than now in 4th Quarter 2019
1 EUR = 1.14 USD 1st Quarter 2019
1 EUR = 1.1146 USD 4th Quarter 2019
The Above data means previously we were buying more USD buy giving 1 EUR and now we are buying less USD by giving 1 EUR it means that the value of EUR is decreased.
How Inflation Affects Forex Market
The inflation has a major impact value of the currency of a country and the rates of foreign exchange it has with other currencies.
Inflation is not all that makes the change in the exchange rate, but it is only one factor that makes a change in the exchange rate.
When there is inflation in any country
How Interest Rate Affects Forex Market
Higher the interest rate, higher the value of the currency, because the higher interest rate will lead the foreigners to invest in the country, and buying more of the given country’s currency, as higher the demand higher the value of that currency and more that goes up.
Because of all the flow of interest rate and exchange rate the forex market, hence the forex market will be tending to go up.
Conclusion
All the above two factors can impact directly or indirectly the exchange rate and the exchange rate ultimately impacts the forex market up and down.
AS forex market is running on the country’s overall performance. So as the inflation and the interest rate get impacted the overall impact will be on the exchange rate of the country.