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When will central banks stop raising interest rates?

That’s the multi-trillion- dollar question that has investors, bankers, lenders, borrowers and most importantly traders scratching their heads.

Why, it will change the dynamics, the PIVOT as we keep reading.

To make this easy, if the FED slows down its aggressive rate hikes, things will change, a possible bottom of the stock market and a reversal in the strength of the dominant USD and reversal in Gold, as just a few examples.

At Chump profit, we trade currencies because “the trend is your friend” , if we get in correctly, we make big money, and we like leverage.

So, if we knew the answer in advance, what would we trade?

How about the EUR/USD?

The relationship between the euro (EUR) and the U.S. dollar (USD) marks the most liquid forex pair in the world, with tight spreads and broad price movement that supports a continuous flow of profitable opportunities.

EUR/USD transactions represent approximately one quarter of all forex trades

More experienced players can increase position size to take full advantage of profit opportunities.

The overview.

The pair moves, especially with economic data news, fundamentals, and technical analysis.

What Is the EUR/USD?

EUR/USD is a currency pair. It represents the relationship between the two most highly traded currencies in the world. In terms of value, a quote for EUR/USD will indicate the amount of U.S. dollars needed to buy 1 euro.

What Affects the Value of EUR/USD?

The EUR/USD currency pair exchange rate can be affected by economic and political conditions in the U.S. and the countries of the eurozone. Actions by the Federal Reserve and the European Central Bank can influence the spread. So can monetary policies of countries with major economies, such as Germany. To trade effectively, it's important for traders and investors to stay on top of what's happening on both sides of the Atlantic.

Can Technical Analysis Help Those Trading the EUR/USD?

Both fundamental analysis and technical analysis can inform forex trading and investment decision-making. Fundamental analysis involves using economic data to set trade entry and exit points. Technical analysis uses chart patterns of price action and associated technical indicators to time executions. Technical analysis may be extra helpful for those who trade actively in the highly liquid, fast moving forex market.

Now the strategy.

The volatility which surrounds the FOMC’s decision can be a source of potential trading opportunities. Day traders in particular might adapt their strategy to maximise on the shifts which occur both before and after the meeting.

Speculation weeks before the announcement is common, meaning that the markets may be prepared for either outcome. Those who prefer to follow long-term trading patterns should bear in mind that the FOMC’s decision may take a considerable amount of time to fully impact the economy.

By formulating a trading strategy which accounts for each meeting, traders might be able to maximise on the movements, whatever the outcome.

This is the strategy that will make you happy. This is simple.

The News/Data trading strategy

A news/data trading strategy​​ involves trading based on data released and market expectations, both before and following news/data releases.

Therefore, will the FED increase the rates by the expected 0.75%, has this been priced in?

Or will they shock the market and go 1% or even shock it more by reducing the hike to 0.25%.

Trading on news announcements can require a skilled mind-set as news can travel very quickly on digital media. Traders will need to assess the news immediately after it’s released and make a quick judgement on how to trade it. Some key considerations include:

Is the news already fully factored into the price of an instrument or only partially priced in?

Does the news match market expectations?

Understanding these differences in market expectations is crucial to success when using a news trading strategy.

So what are the expectations. Check your economic calendar.

Expectations by most analysts is 0.75.

Closer to the time of the release the calendar will be updated with a forecast of what the market and leading economists are expecting the decision to be. At the time of the release, the 'actual' number will be updated.

If the actual number is higher than the previous or forecasted number it is known as a Fed rate hike. Typically, the US dollar will rise on this occasion - depending on what has already been anticipated by the market.

If the actual number is lower than the previous or forecasted number it is known as a Fed rate cut. In this situation, the US dollar will typically fall - again, depending on what has already been anticipated by the market.

At this stage, it is important to remember that markets move on anticipation or expectation of a particular result. Large institutions will already start to adjust their positions and portfolios if there is a higher likelihood of one result over another. Any large moves at the time of the actual result could mean that the market has been caught by surprise.

For traders, one of the ways to trade a possible Fed rate hike, or Fed rate cut, is to simply try and capitalise on the potential volatility of the news announcement. Markets tend to trade quietly in the run-up to high impact news announcements before increasing in volatility once the result is announced.

Simple, Currency Pairs Correlation Strategy forex markets stocks shares indices & strategy

Any impact on the stock market to a change in the interest rate changes is generally experienced immediately, while, for the rest of the economy, it may take about a year to see any widespread impact.

Higher interest rates tend to negatively affect earnings and stock prices (with the exception of the financial sector).

What Happens When Interest Rates Rise?

When the Federal Reserve acts to increase the discount rate, it immediately elevates short-term borrowing costs for financial institutions. This has a ripple effect on virtually all other borrowing costs for companies and consumers in an economy.

Because it costs financial institutions more to borrow money, these same financial institutions often increase the rates they charge their customers to borrow money. So individuals consumers are impacted through increases to their credit card and mortgage interest rates, especially if these loans carry a variable interest rate. When the interest rate for credit cards and mortgages increases, the amount of money that consumers can spend decreases.

Consumers still have to pay their bills. When those bills become more expensive, households are left with less disposable income. When consumers have less discretionary spending money, businesses' revenues and profits decrease.

So, as you can see, as rates rise, businesses are not only impacted by higher borrowing costs, but they are also exposed to the adverse effects of flagging consumer demand. Both of these factors can weigh on earnings and stock prices.

Interest Rates and the Stock Market

If a company is seen as cutting back on its growth or is less profitable—either through higher debt expenses or less revenue—the estimated amount of future cash flows will drop. All else being equal, this will lower the price of the company's stock.

If enough companies experience declines in their stock prices, the whole market, or the key indexes many people equate with the market—the Dow Jones Industrial Average, S&P 500, etc.—will go down. With a lowered expectation in the growth and future cash flows of a company, investors will not get as much growth from stock price appreciation. This can make stock ownership less desirable. Furthermore, investing in equities can be viewed as too risky when compared to other investments.

However, some sectors stand to benefit from interest rate hikes. One sector that tends to benefit the most is the financial industry. Banks, brokerages, mortgage companies, and insurance companies' earnings often increase—as interest rates move higher—because they can charge more for lending.

Interest Rates and the Bond Market

Interest rates also impact bond prices and the return on certificate of deposits (CDs), Treasury bonds, and Treasury bills. There is an inverse relationship between bond prices and interest rates: as interest rates rise, bond prices fall (and vice versa). The longer the maturity of the bond, the more it fluctuates in accordance to changes in the interest rate.

When the Federal Reserve raises the federal funds rate, newly offered government securities—such as Treasury bills and bonds—are often viewed as the safest investments. They will usually experience a corresponding increase in interest rates. In other words, the risk-free rate of return goes up, making these investments more desirable. As the risk-free rate goes up, the total return required for investing in stocks also increases. Therefore, if the required risk premium decreases while the potential return remains the same (or dips lower), investors may feel stocks have become too risky and will put their money elsewhere.