One subject
Inflation and interest rates
8 lessons, 51 glossary terms and 23 market guides cover this across the academy. Each one links to its own page, and nothing is repeated here.
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The curriculum
8 lessons cover this.
In curriculum order, which is the order you would meet them.
- How financing differs across instrumentsModule 04What a trade actually costs7 min
- What macro means for a traderModule 08Macro and the calendar7 min
- What inflation is and why it moves marketsModule 08Macro and the calendar8 min
- What interest rates do to a currencyModule 08Macro and the calendar9 min
- What a central bank actually doesModule 08Macro and the calendar9 min
- The Federal ReserveModule 08Macro and the calendar13 min
- The ECB, the Bank of Japan and the People's Bank of ChinaModule 08Macro and the calendar9 min
- The CBUAE and SAMAModule 08Macro and the calendar9 min
The glossary
51 terms belong here.
Alphabetical, each defined in one sentence on its own page.
- Accrued interestInterest a bond has earned since its last coupon payment but not yet paid out, added to the purchase price so the seller keeps what accrued while holding it.
- AppreciationA rise in the market value of one currency against another, produced by demand rather than by official decision, and always the exact mirror of a fall in the other.
- Balance of tradeThe value of a country's exports of goods and services less the value of its imports over the same period, published by its statistics agency on a monthly or quarterly cycle.
- Bank of JapanThe Bank of Japan is Japan's central bank, responsible for monetary policy in the yen, and it is the institution whose decisions and outlook reports move every pair the yen sits in.
- Basis pointOne hundredth of one percentage point, used so that a change in a rate, a yield or a fee can be stated without the ambiguity the word percent carries.
- Bond yieldThe return a bond offers at its current market price, which moves in the opposite direction to that price and is the figure macro comparisons use rather than the fixed coupon.
- Carry tradeA carry trade holds a higher yielding currency against a lower yielding one, so the interest rate differential between them is credited or debited daily while the position stays open.
- Central bankA central bank sets a country's official interest rate and manages its money supply, which makes its scheduled decisions the largest single influence on that currency and its government bonds.
- Consumer price index (CPI)The consumer price index measures the average change in the prices households pay for a fixed basket of goods and services, and it is the most watched inflation release.
- Core inflationCore inflation is a price index calculated with the most volatile components removed, usually food and energy, published so that a persistent trend can be read without the noise those components add.
- DeflationA sustained fall in the general price level, which raises the real value of money and of existing debt, and which central banks treat as harder to reverse than inflation.
- DovishDescribing a policymaker or a statement that leans toward looser monetary policy, weighting growth and employment more heavily than the risk of rising inflation.
- DurationA measure of how far a bond's price moves when its yield changes, expressed in years, rising with the time to maturity and falling as the coupon grows.
- Economic indicatorAn economic indicator is a published statistic describing part of an economy, such as output, prices, employment or sentiment, on a fixed schedule and a defined methodology.
- European Central BankThe European Central Bank sets monetary policy for the euro area, taking one decision that applies to every member economy, which is the constraint that shapes how its announcements are read.
- Federal funds rateThe rate at which banks in the United States lend reserve balances to one another overnight, and the rate the Federal Reserve steers as its main instrument of monetary policy.
- Federal Open Market Committee (FOMC)The committee inside the United States Federal Reserve that sets the target range for the federal funds rate and directs the central bank's holdings of securities.
- Federal ReserveThe Federal Reserve is the central bank of the United States, and its rate setting committee takes the decision that anchors the dollar and, through it, prices in nearly every other market.
- Fiscal policyA government's use of taxation, spending and borrowing to influence demand in its own economy, decided by the finance ministry and the legislature rather than by the central bank.
- Fixed exchange rateAn exchange rate that a country's authorities hold at a stated level, or inside a stated band, against another currency or a basket, maintained by intervention rather than by the market.
- Forward guidanceForward guidance is a central bank's published description of how policy is likely to develop, treated as a policy instrument in its own right because expectations move rates long before a decision does.
- Fundamental analysisStudy of the economic and financial facts behind a price, from interest rates and growth to company earnings and physical supply, aimed at an estimate of what an instrument is worth.
- Gross domestic product (GDP)Gross domestic product measures the total value of goods and services produced within a country over a period, the broadest single reading of whether an economy grew or shrank.
- HawkishDescribing a central banker, a statement or a policy stance leaning towards tighter monetary policy, meaning higher interest rates or less stimulus, usually because inflation is the greater concern.
- InflationInflation is the rate at which the general level of prices rises over time, reported as the percentage change in a basket index against the same month a year earlier, and it is the variable most central bank mandates are written around.
- Interest rateAn interest rate is the price of money over time, quoted as a percentage a year, and the rate a central bank sets for overnight lending anchors nearly every other rate denominated in that currency.
- Interest rate differentialAn interest rate differential is the gap between the interest rates of two currencies, and it is the quantity the overnight adjustment on a currency position is calculated from.
- Investment gradeInvestment grade is the band of credit ratings covering borrowers an agency judges least likely to default, running from the top rating down to BBB minus or its equivalent, with everything below it classed as high yield.
- ISM manufacturing indexThe ISM manufacturing index is a monthly survey of United States purchasing managers in which a reading above fifty says more firms reported expansion than contraction in the month just ended.
- Monetary policyMonetary policy is how a central bank steers credit conditions in its economy, mainly by setting a policy rate and by operating on the size of its balance sheet.
- Nominal valueNominal value is the face amount stated on a security, the principal a bond repays at maturity and the base its coupon is calculated on, and it is not the price the security trades at.
- Non-farm payrollsNon-farm payrolls counts the jobs added or lost across the United States economy outside farming, published monthly by the Bureau of Labor Statistics and watched closely across every market.
- People's Bank of ChinaThe People's Bank of China is China's central bank, and it manages the renminbi within a band around a daily reference rate rather than letting the currency float freely.
- Producer price index (PPI)The producer price index measures the change in prices received by domestic producers for their output, which places it earlier in the chain than the prices households eventually pay.
- Purchasing managers index (PMI)A purchasing managers index converts a monthly survey of firms into a single diffusion reading, where the fifty mark separates a majority reporting improvement from a majority reporting deterioration.
- Purchasing power parityPurchasing power parity is the proposition that an exchange rate settles where an identical basket of goods costs the same in two countries once converted at that rate.
- Quantitative easingQuantitative easing is a central bank's purchase of government bonds with newly created reserves, used to push longer term interest rates down once its policy rate is near its floor.
- Quantitative tighteningQuantitative tightening shrinks a central bank's balance sheet, usually by letting bonds mature without reinvesting the proceeds, which drains reserves from the banking system and reverses quantitative easing.
- Rate decisionA rate decision is the scheduled announcement in which a central bank's committee sets its official policy rate, published alongside a statement that explains the vote and frames what the committee expects next.
- RecessionA recession is a broad and sustained decline in economic activity, popularly reported as two consecutive quarters of falling output but formally dated on a wider set of measures than output alone.
- Repo rateA repo rate is the interest on a repurchase agreement, which is a short term loan of cash secured against securities, and in several economies it is also the name given to the central bank's official policy rate.
- Sovereign debtSovereign debt is borrowing by a national government, issued as bills and bonds whose yields become the reference rate against which almost everything else priced in that currency is measured.
- StagflationStagflation is the combination of stagnant growth, rising unemployment and persistent inflation at the same time, a mix that leaves a central bank with no single response that improves both problems.
- Treasury yieldA Treasury yield is the annual return implied by the price of a United States government security, and because price and yield move in opposite directions, a falling yield means a rising bond.
- Unemployment rateThe unemployment rate is the share of a country's labour force that is without work and actively looking for it, measured by a household survey and published on a fixed monthly calendar.
- Year on yearA year on year figure compares a reading with the same period twelve months earlier, which cancels any pattern that repeats annually and is the form most inflation and growth headlines are quoted in.
- YieldYield states the income a holding pays over a year as a percentage of what it costs, so the same unchanged payments produce a higher yield whenever the price of the holding falls.
- Yield curveA yield curve plots the yields of one issuer's bonds against how long each has left to run, so its shape shows what the market charges to lend to the same borrower for longer.
- Yield curve inversionA yield curve inverts when a longer dated bond yields less than a shorter dated one from the same issuer, most often the ten year yield falling below the two year.
- Yield spreadA yield spread is the difference between two yields, quoted in basis points, and it isolates whatever separates the two securities, such as credit risk, country risk or the distance between two maturities.
- Zero lower boundThe zero lower bound is the point past which a central bank cannot usefully cut its policy rate, because a depositor facing a charge can hold physical cash instead.
The market guides
23 guides answer a question about it.
Standalone reference answers, entered laterally rather than worked through.
- What moves a currency pairMarketsThe channels that reprice a rate, why every move has two possible sources, and where that framework stops.
- European indicesMarketsGermany 40, UK 100, France 40 and Euro 50 compared: what dominates each list and when they trade.
- Emerging market indicesMarketsHow a market comes to be classified as emerging, and the properties that separate these contracts.
- What moves an indexMarketsEarnings expectations, the discount rate, the risk premium, sector mix, currency and index flows.
- How the gold market worksMarketsThe London and New York venues that set the reference price, who holds gold, and what reprices it.
- What moves commodity pricesMarketsThe drivers common to every commodity: inelastic supply, inventory, the dollar, energy, weather and policy.
- Bond ETFsMarketsWhat fixed income funds hold, why price and yield move oppositely, and what duration and spread describe.
- The FOMC and the Federal Reserve rate decisionEventsWho sits on the FOMC, what a rate decision decides, and the four documents a meeting produces.
- US CPI, the consumer price indexEventsWhat the CPI basket contains, how it is collected and weighted, and why headline and core readings differ.
- US non-farm payrolls and the employment reportEventsThe two surveys behind one report, and why the payroll count and the unemployment rate can disagree.
- US retail sales and the control groupEventsWhat the survey covers, why the headline is nominal, and the exclusions that produce the control group.
- The ECB rate decision and the Governing CouncilEventsHow the Governing Council votes, why the euro area has three policy rates, and what a meeting produces.
- Euro area inflation and the harmonised indexEventsWhy the euro area needs a harmonised index, what harmonisation standardises, and how the estimates differ.
- The Bank of England decision and the MPC voteEventsHow the MPC is composed, why the named vote split is the distinguishing feature, and what the report adds.
- UK inflation and labour market dataEventsThe difference between CPI, CPIH and the retail prices index, and how the labour release is assembled.
- The Bank of Japan decision and its unscheduled release timeEventsHow the Policy Board votes, the instruments beyond a single rate, and why the release time is unscheduled.
- The People's Bank of China and China activity dataEventsHow the People's Bank of China signals policy, how the daily fixing works, and what the monthly data covers.
- The Central Bank of the UAE and the dirham pegEventsHow the dirham peg is maintained, and why a fixed rate moves rate setting to the anchor economy.
- The Saudi Central Bank and the riyalEventsThe two policy rates the Saudi Central Bank operates, and why they move on the anchor economy's calendar.
- The RBA and RBNZ decisionsEventsHow the two antipodean central banks are structured, and the rate track that only one of them publishes.
- The Bank of Canada and Swiss National Bank decisionsEventsTwo smaller central banks, one a consensus committee, the other a board with an interventionist history.
- Central bank symposia and forward guidanceEventsThe three forms guidance takes, why a promise is an instrument, and the blackout conventions around it.
- The Saudi riyal pegStructureThe shape of the riyal's fixed rate arrangement, and where pressure is priced when spot cannot move.
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