An interest rate is the price of money — what it costs to borrow, and what you earn for lending or holding. In forex the rate that matters most is the official one set by each central bank, because it anchors everything built on top of it. Money tends to flow toward currencies that pay more and away from those that pay less, which makes interest rates, and the gaps between them, one of the strongest currents in the market.
What it is
The headline figure is the central bank's policy rate: the Fed funds rate in the US, Bank Rate in the UK, and so on. It is the rate at which the banking system borrows, and it filters through to mortgages, business loans and savings. For a currency, the level itself matters less than two other things:
- The differential — how one country's rate compares with another's. Capital chases the higher yield.
- The direction — whether rates are expected to rise or fall from here. Markets price the path, not just the point.
A currency paying 5% while its neighbour pays 0.5% has a powerful pull, all else being equal. But "all else" rarely is equal, which is why a high rate alone does not guarantee a strong currency.
How it works
Higher rates attract foreign money seeking a better return, which lifts demand for the currency. Lower rates do the opposite. This is where the carry trade comes from: borrow in a low-rate currency, hold a high-rate one, and pocket the difference. For years traders borrowed cheap yen to buy higher-yielding currencies for exactly this reason. In your MetaTrader account the same force shows up as swap: the small amount credited or debited each night for holding a position over the daily rollover. Hold the high-yield side and swap usually pays you a little; hold the low-yield side and it costs you. Over a long-held position those nightly figures add up, for better or worse, and an EA that holds trades for days is quietly paying or earning swap the whole time.
Why it moves FX
Because the market trades expectations, a currency often moves before a single rate changes. If data suggests a central bank will have to hike sooner than thought, its currency can rally that day, weeks ahead of any decision. Rate cuts, or the hint of them, tend to weaken a currency the same way in reverse. What really drives a pair over time is the difference between two central banks' expected paths: one hiking while the other cuts is a strong, lasting tailwind for the first currency. This is why traders watch inflation figures, jobs data and central bank speeches so closely. Each one nudges the expected path up or down, and the currency moves with it.
An example
Picture a classic carry trade. Australia's rate is 4% and Japan's is 0%. You buy AUDJPY, effectively earning roughly the 4% gap each year in swap while you hold, paid in nightly instalments to your account. In calm markets that works quietly in your favour. But carry trades carry a sting: the high-yield currency is usually the riskier one, and when fear hits and money runs to the yen, AUDJPY can drop several percent in days — wiping out a year of swap in a single afternoon. The rate differential paid you to wait; the risk decided whether waiting was worth it. That trade-off sits behind a great many EAs that look steady until the one week they are not.
The Karnek note
Swap is the interest-rate story landing in your account every night, and on long-held positions it adds up. Karnek reads your live terminal and shows what each account is actually doing, swap and all, across every EA on one screen. It is read-only by design: it monitors and alerts, and can never open or close a trade.
Written and reviewed by the Karnek Research team. Last updated August 2026.
Educational content only - not financial advice. Past performance does not predict future results. Trading carries significant risk.