Interest rate

Core forex fundamental. Higher yields attract capital and command a risk premium, rate differentials drive carry trades, and every major data release ultimately gets priced as "does this raise or lower rate expectations?". Here is what sits underneath that sentence. ### What the rate actually is A policy rate is the price of overnight money in an economy. The US version is the clearest model: the FOMC does not publish one number, it sets a **target range** for the federal funds rate, the overnight borrowing rate between banks, then steers the market rate into that range mainly by adjusting the interest it pays on reserve balances, with its overnight reverse repo facility acting as a floor ([Federal Reserve](https://www.federalreserve.gov/aboutthefed/fedexplained/monetary-policy.htm)). Moves are quoted in basis points, one basis point being a hundredth of a percentage point. The market treats 25 basis points as the standard step. CME builds that assumption straight into the FedWatch tool, whose probability maths assumes rate changes come in multiples of 25 bps. ### How it reaches your account Two direct lines, no macro theory required: - **Swap.** Your overnight financing is computed off the differential between the two currencies in the pair. Hold the higher-yielding one against the lower-yielding one and you get credited, hold it the other way and you pay. Same mechanic as Swap / Rollover, charged at broker rollover, tripled on Wednesday. - **Carry.** That same differential, held deliberately, *is* the carry trade. It is also why a differential that suddenly narrows can force a violent unwind in a pair that had been drifting quietly for months. ### The bit that catches people out You never trade the rate. You trade the gap between the decision and what was already priced. Fed funds futures let anyone read the market's expected path in advance, which is exactly what CME's FedWatch tool renders as a probability per meeting. So if a cut is fully priced and the cut duly arrives, the currency can go nowhere, or even rally. BabyPips frames the right question well: before any release, ask what the market already expects, not what the number will be. That is how a cut strengthens a currency and a hold crushes one. The rate is the headline. The expected path is the trade. ### Where it lands in our system Rate expectations are, ultimately, what DXY is pricing. Our External Factors check reads EURUSD against DXY, so the two rate stories that matter for that pair are the Fed's and the ECB's. Rates set the weather. They do not hand you an entry. Structure does that.