Policy rate (interest rate)
The policy rate is the interest rate a central bank sets to steer the cost of money in the economy. It has a strong influence on currencies.
Each central bank has its benchmark: the fed funds target range in the US, the deposit rate for the ECB, Bank Rate for the Bank of England. Raising it slows credit and inflation; cutting it supports activity.
For currencies, it is a major driver. A currency whose rates are rising, or expected to rise, attracts capital and tends to strengthen. Expectations matter most: a hike that is already priced in often has little effect on the day.
The rate gap between two currencies also determines the swap on positions you hold overnight.