EURUSD Falling Down Strongly On FED Interest Rate Hike Bets

EURUSD is falling down strongly as USD is getting stronger against EURO. More and more bets are being placed that FED interest rate hike is coming in the next few months most probably in June. These bets are making USD strong and strong. Plus there is a huge USD dominated debt in the international market that is ensuring that USD rally continues. The U.S. dollar rose against the euro on Monday in a continuation of last week’s bets that the U.S. Federal Reserve will hike interest rates in the coming months, while the yen edged higher on uncertainty surrounding the Bank of Japan’s easing policies.

If you are a EURUSD trader then you must be aware that EURUSD has been in a strong downtrend since June last year. EURUSD has lost more than 3,000 pips since last June. EURUSD is a pair that only moves when the central banks want it to move. Most of the time it ranges. But when there is a big announcement by ECB or FED, it suddenly wakes up and you can catch 500-1000 pip moves easily.

ECB has fired its shots in January when it started its own QE program. EURUSD fell around 500 pips when ECB announced the start of QE a technical term for bond purchase. Now FED is more important for EURUSD. Last month, when FOMC Meeting Minutes were released with this statement that FED will increase interest rates most probably started from June. On this one statement EURUSD jumped up  around 500 pips. Why? EURUSD should have gone down. EURUSD shot up because market realized that the interest rate hike is a few months away.

So how does FED control EURUSD? This is very simple to understand. FED decisions affect USD. Any decision that strengthens USD means EURUSD going down. Right now interest rates are almost zero in US economy. When FED hikes the interest rates, investors will move their deposits into USD which will naturally make USD strong. Now FED has said clearly that it will increase interest rates gradually in steps so as not to shock the market as what happened when the inexperienced Swiss National Bank shocked the market with its sudden decision to unpeg CHF from EURO. A few of the big brokers went bankrupt when USDCHF fell around 2000 pips in just less than a minute. This was unprecedented that may not repeat in the next few decades.

So if you are a EURUSD trader keep an eye on FED and it’s decision. As a matter of fact FED decision affects all the USD pairs like EURUSD, GBPUSD, USDJPY, NZDUSD, AUDUSD, USDCAD etc. Interest rate increase or decrease is always a big news of the market. Whenever the central bank increases or decreases the interest rate expect the market to move big time.

The big dilemma facing Fed officials is when to start raising short-term interest rates. Right now, bets are on June or September, though an increasing number of investors seem to be betting that the rise won’t take place until September.

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