Part II. The Power of Interest Rates. Commander in Pips: Interest rates are an intrinsic power of Forex markets. This is just the Force in Star Wars that connects everything in the Universe. So as interest rates move, they force FX rates to move. Without any hesitation, we can point that interest rates as the most important and powerful factor of the FX market. Interest rates are appointed by Central Banks when they make regular Fiscal policy announcements and Interest rates decisions almost always its major part. Now you know that keeping your finger on the pulse of Central Bank’s meetings is must. Pipruit: Hm, I’ve got that. But why do Central Banks changes interest rates? And when do they decide to increase them or decrease? Commander in Pips: The point is that the reverse side of interest rates is inflation. This is just like a double edged sword. In fact, an economy stands on the balance between growth and inflation. Inflation is a gradual increase in prices of different goods, services and all material in our world. It comes from gradual growth of the amount of money in the world, while all resources are of limited value. That’s why in “Back to the future” in the 50’s a Coke has cost only 20 cents, while currently around 2 bucks. It’s even not necessary to mention that prior to the 70s there was a gold standard; we’ve discussed it in the history chapter. Although this perspective is a bit hard for many people to believe, the dependence between interest rates, economy growth and inflation is very tight. Moderate inflation comes with economic growth, but too much inflation could harm an economy. That’s why Central Banks always take a close look over commodity prices and some inflation indicators, such as PPI, CPI and PCE indexes.