Interest rates change is the biggest driver of the currency market. When FED increases the US interest rates expect USD to grow strong and as a consequence most of the pairs like GBP/USD, EUR/USD and AUD/USD will fall. Did you read the post US Dollar rally crushing commodities? In the first week of December 2016, Federal Reserve Bank finally increased the interest rate. This drove the above currencies down. Federal Reserve Bank member is on record that three more rate increases will take place in 2017. Watch the video below that explains how interest rates are set by Federal Reserve Bank!
After watching the above video you should know that FED can only control the overnight interest rate that banks charge from each other on reserve requirement with Federal Reserve. This overnight interest rate is known as fund rate. FED can only increase/decrease this fund rate. This fund rate slowly ripples through rest of the economy and changes the other medium term and long term rates. Did you take a look at our Time Series Analysis for Traders Course? In this course, we teach you in simple terms how to use time series analysis in your trading. Watch this video on who are the winners and losers when interest rates rise!
Obviously when US Dollar appreciates as a result of an interest rate increase, it will make the exports more expensive. On the other hand, a strong dollar is going to make imports cheaper. So there are always winners and losers when rates are increased/decreased.
Federal Open Market Committee (FOMC) is the committee that has the authority to increase/decrease interest rates. It meets once every month. During the meeting, the broad economic situation is discussed and decision taken whether to increase/decrease interest rate. FOMC Meeting minutes are keenly watched by the traders and investors as the rate decision affects the stock market, currency market as well as the commodity market. If you are interested in learning quantitative trading, take a look at our course Python Machine Learning for Traders.