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Old 05-31-2009, 12:58 AM   #1 (permalink)
 
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Interest rate effects on currency


hi

i wanted to ask about interest rate cuts and increases , as i dnt understand how a currency behaves when the interest rates move .

bank of england and european central bank are expected to annonce new interest rates on thursday , and during the last 2 times BoE cut its interest rates , it instanly moved the GBP / USD by about 100 pips up .
that means it strenghted the pound , but i alwas thought that interest rate cuts weaken a currency ?

i just wanted to know would a currecy always go up if the central bank announces a interest rate cut ?
and would a currecy pair go down if the central bank increases the interest rate ?
and what would happen if the interest rate is announced to stay the same ?


if you get this right it can be a easy for for new traders to make easy bucks by just trading interest rate increases and decreases .

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Old 05-31-2009, 01:09 AM   #2 (permalink)
 
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Originally Posted by shaby View Post
hi

i wanted to ask about interest rate cuts and increases , as i dnt understand how a currency behaves when the interest rates move .

bank of england and european central bank are expected to annonce new interest rates on thursday , and during the last 2 times BoE cut its interest rates , it instanly moved the GBP / USD by about 100 pips up .
that means it strenghted the pound , but i alwas thought that interest rate cuts weaken a currency ?

i just wanted to know would a currecy always go up if the central bank announces a interest rate cut ?
and would a currecy pair go down if the central bank increases the interest rate ?
and what would happen if the interest rate is announced to stay the same ?


if you get this right it can be a easy for for new traders to make easy bucks by just trading interest rate increases and decreases.
Hi Shaby ,

When a central bank cuts or increases rates , they are literally increasing or decreasing the money in circulation respectively . Common wisdom says that rate increases tend to strengthen a currency because the currency is higher yielding now as to before . There is a carry trade strategy that some traders use . By using the differential of each currency ' s yield , traders make a profit from buying the currency with a higher yield and selling that of a lower yield .

In these times of economic volatility , its often more important to understand why rates are raised and lowered . As you said the pound strengthened when the BoE cut rates . That might be due to commentary following the rate cut .

I want to say that thinking about trading rate decisions is a risky business and i DON ' T recommend anyone do that . Furthermore , trading is about consistent profits and not one big fish once in a while .

Hope this helps

Forexer
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Old 06-05-2009, 03:08 PM   #3 (permalink)
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Hi shaby

How are you ?

Like forexer said , in general , increasing an interest rate usually causes money to flow into the country for fixed income investments , which causes the currency to strengthen .
Cutting interest rates causes a currency to get weaker because money will flow out of the country looking for better returns elsewhere .

As you can see with the GBP , that is not always the case though .
For the Pound , the cutting of rates was a sign that the government was attempting to improve an economy falling hard , the rate cut caused a rally ( With the theory being that the rate cut would help improve the economy , and bring back some of the money that left when the economy started downhill , offsetting the money that leaves for better returns elsewhere ).

Quote:
"what would happen if the interest rate is announced to stay the same?"
The big factor would be , and this applies to when they raise or lower interest rates as well , is what the consensuses thought would happen . If the ' experts ' thought that the interest rate was going to be cut 1 / 2 point , and they do nothing , things will react a lot more than if the 0 cut was estimated ahead of time .

Cheers
Tek
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Old 06-05-2009, 05:25 PM   #4 (permalink)
 
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ok got it , but i dnt understand why on thursday when BoE and europe central banks announced that rates will stay unchanged there was a delay in the rally , for the first 30 minutes when BoE announced its rate unchnaged price was at the same levels for the first 30 minutes and suddenly it went bang and droped down , the same thing happened later with the euro when the rates were announced unchanged by the european central bank . Did the hedge funds and investment banks wake up late that day

btw . i was comparing GBP / USD and EUR / GBP
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Old 06-08-2009, 09:53 PM   #5 (permalink)
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Hi shaby

I do not know specifically .
There could have been other things in the news that caused this . Gordon Brown is in hot water for one thing .
Also , if the interest rate announcement is what was expected , sometimes price won ' t react much .

Cheers
Tek
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Old 06-09-2009, 12:27 AM   #6 (permalink)
 
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Quote:
Originally Posted by Tekmnd View Post
Hi shaby

I do not know specifically .
There could have been other things in the news that caused this . Gordon Brown is in hot water for one thing .
Also , if the interest rate announcement is what was expected , sometimes price won ' t react much .

Cheers
Tek
I am not sure on this but I think it was because the market were expecting EUR central bank to hint at a rate cut .

Nothing was immediately clear and it took a while for the market to take in the lack of such an announcement with the resultant bounce in EUR ( that caught me out quite badly with worst slippage I have yet experienced )

Graeme
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