Learn how yield spreads influence forex trading, using EUR/USD as a case study. Discover the key factors driving currency value shifts.

Forex traders often find themselves relying heavily on the link between currency values and interest rate fluctuations. The idea is simple: when interest rates are high, investors from other countries are more likely to put their money into the country, which improves the currency's demand and value. Alternatively, the value of a currency declines when interest rates are low because investors shy away.

One must be familiar with the pairing of currencies in order to comprehend the connection between interest rates and these global commodities. Exchange rates between common currencies are the US dollar, the euro, and Japan's yen. Looking at the yield spread, which is the difference between the bond rates of the two nations in each pair, can help you visualize the link.

For example, think about the EUR/USD market. If you want to use the Euro as your base currency, you may do that by comparing the yield on the German bond—a benchmark for the Euro Area—with the yield on the US bond. Simply put, the yield spread is the disparity between these two yields. It is possible to see that the yield spread usually comes before the price changes of EUR/USD by comparing this spread to the EUR/USD price chart.
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