Interest Rates – Interest Rates And Foreign Exchange Market
Interest Rates The increases and decreases in interest rates have a direct effect on the foreign exchange market.
- Politics and significant world events directly affect the markets (the Madrid Stock Exchange)
- There are more predictable elements of fundamental analysis. Such as scheduled press conferences and others that can take markets by surprise. Such as bombings, unexpected announcements, or military action.
- Many indices and companies will see their numbers change considerably due to these events.
- Always consider the socio-political context of the country or region of the company in which you decide to invest. Deciding to open a transaction.
- If for a case, the European Central Bank increases interest rates on the euro, it will generally lead to an appreciation of the European currency (learn about the foreign exchange market). This appreciation will cause an increase in the price of those currency pairs in which the euro is the base currency, the best known of these pairs being the euro dollar: EUR/USD.
- On the contrary, if the European Central Bank announces a drop in interest rates, a depreciation of the European currency will be expected to decrease the price of the EUR/USD and of the rest of the pairs in which the euro be the base currency.
- Interest Rates And Stock Markets
It should also bear in mind that decisions on interest rates affect the foreign exchange market and affect other financial needs. Such as stock markets. This relationship can be seen in the following example:
On February 5, 2018, Jerome Powell took office as the new chairman of the Fed. That same day, the Dow Jones registered one of the most significant falls in its history, falling 4.6% compared to the previous day’s close. This setback was caused by fear of the policy of interest rate hikes announced by the new president of the FED. This fall, as is logical, extends to the rest of the Wall Street indices.
Why Do Stocks Go Deject When Interest Rates Go Up?
The answer is simple. When interest rates rise, companies’ financing cost increases, so they must allocate more economic resources to meet their financial needs. By increasing their costs, companies see their ability to grow limited. This decrease in the growth of companies entails a reduction in the valuation of their shares. A drop price they list on the market.
Cases. Sometimes, it also happens that unexpected events occur that result in specific companies or sectors acquiring an advantage situation. This advantage can be, for example. An increase in demand for the products they sell or the disappearance of competitors. This situation causes an increase in interest in the shares of these companies, which increases their price on the stock market. Two examples of these situations are explained below:
Announcement Of A Military Intervention
The announcement of military intervention abroad can cause the price of shares (learn how you can buy shares online) of war material and weapons (Lockheed Martin, Rockwell Collins, etc.) to increase markedly.
Armed conflicts often increase profits for military manufacturing companies. Their shareholders and speculators. Likewise. These conflicts can also increase the value of the shares of the companies that supply them with raw materials and other technology companies that provide services that have their application in this type of conflict.
What Happened In The Markets With The Attacks In France?
What happened after the attacks that occurred in France in 2015. After an event such as an attack, it is normal for concern to improve surveillance systems to increase after the attacks in Paris in November 2015. The American surveillance camera company Flier Systems increased its stock market value by 12% in the following three days of the attack.
Faced With This Reality, The Obligatory Question For Every Operator Is:
What announcements should I pay attention to in my trading operations? The answer is not unique, depending on the instrument you are trading. However, you will need to follow some specific information regardless of the trading instrument. All investors should be aware of some systematically repeated announcements and give continuous signals about the evolution of the world economy. These ads are:
- Announcements from the US Federal Open Market Committee (FOMC).
- Statements from the US Federal Reserve (FED) the USA.
- Monthly announcement of the Non-Farm Payrolls (NFP). An economic event that usually has an immediate impact on the markets since it is one of the most reliable indicators of the health of the US economy (it analyzes the number of new jobs excluding the agricultural sector)
- Speeches by the leadership of the IMF and the European Central Bank (ECB, European Central Bank).
- Declarations and measures of the largest Central Banks. Such as those of the US, Europe and the central Asian powers
In short, you should bear in mind that