The effects of a hike in the interest rate on a currency

Forex Trading Nigeria

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Posted by on Thursday September 17, 2015 at 11:26:17:

As at 7 p.m. Nigerian Time today, the US (Federal Open Market Committee) a.k.a. Fed is expected to raise their interest rate for the first time in 7 years and somehow, this is making the US Dollar stronger when traded on forex trading platforms against currencies like the Euro(EUR) and British Pounds(GBP).

A visit to a forex website at sows that the event is expected to have high volatility as the market is expect to react to it n a big way depending on what the final outcome would be. Yes, there is a prediction that it could be raised and so many are buying the Dollar and selling or would I say short sell other currencies.

Why is the US dollar considered strong when interest rates are raised? Well, that's basically the same way it is for any nation's currency in an economy that is driven by the forces of demand and supply. When interest rates are raised it means that the economy is growing stronger and the Central bank doesn't want to make finances available as cheaply as it used to be. An interest rates is basically the rate at which the Central bank would loan out funds to commercial banks and they in turn would increase their rates and hence making loans a bit less attractive to customers.

When interest rates are hiked, it means that there is sustainable growth and the bank doesn't need to make funds easily available again for that growth to continue. It's like weaning a child off breast milk after 6 months of breastfeeding. It is a mark or confirmation that the market is growing and profitable for investors.

So, if after 7 pm, the rates have been increased, it means that the US dollar would grow stronger and stronger against other countries and may even get almost equal to or stronger than Euro given that European economies are still struggling.

If however, the interest rate is not raised by the FED, it means that the trend may reverse and correct itself to it's original state before traders started buying the US dollar and hence currencies like the EURUSD would be bullish.

What to do as a forex trader? Well, you can short sell the EURUSD and buy the USD before the news but exit before results and released and wait for the market to react. You can then enter by going short or long from extremes after market has moved.

How volatile can the market react? Well, I'm expecting a move of up to 80 to 100 pips but it could be less.