USD Interest Rate Hike

[fxscalper90]

How'd everyone do today on the USD interest rate announcement? A lot of volatility for sure.

On my live account I made over 875 points today profit.

A few highlights:

Had a 150-point TP taken out clean on GBP/USD 25 points up from the bottom (see chart snapshot of TP being hit - green square in crosshairs).

Chopped out over 125 points on EUR/USD.

Nailed NZD/USD for over 125 points.



Any other winners today?

fx (I did do a "position adjustment" on my EUR/USD long-term short trade that burned a little gas nothing to cry over.)

[olimits7]

One thing I don't understand since the USD interest rate increased, why did USD get stronger? I thought when interest rates increase the USD would weaken. Can someone please explain this?

Thank you,
olimits7

[fxscalper90]

Originally Posted by olimits7

One thing I don't understand since the USD interest rate increased, why did USD get stronger? I thought when interest rates increase the USD would weaken. Can someone please explain this?

Thank you,
olimits7

Well, in this case, Olimits7, I think it may have been a combo of things.

One, in theory, raising interest rates will control inflation - that makes a nation's economy better to possibly invest in.

Two, as in my case, owning a short EUR/USD trade I am now drawing interest on the instrument against the euro.

Think about it, would you rather have a buy EUR/USD trade (where you PAY interest) or have a sell EUR/USD trade in which you EARN interest?

There are a couple other items that took almost 5 cents of steam out of EUR/USD since March 13th though, but all combine to indicate buying/owning USD may be a less stupid course of action... for at least a few days anyway.

By the way, for those 'forex experts' who are advising people to "buy euro on dips"... I don't call a 500 point drop in 10 trading days a "dip." (see attached chart) For most who are following your advice and buying euro on dips I'd call it a "wipe out." Maybe even "blown accounts."

fxs

[DrForex]

Originally Posted by olimits7

One thing I don't understand since the USD interest rate increased, why did USD get stronger? I thought when interest rates increase the USD would weaken. Can someone please explain this?

Thank you,
olimits7

olimits7

The question is why did you think "USD will weaken on rate increase"?

There is no simple answer to the question, how intra day, intra week currency prices react to these types of "fundamental" events.

To understand this you have to be able to read the complete story line and pick up on the short term "sentiment". Reading the storyline is like watching a soapie. You don't have to watch everything but you can't afford to miss certain episodes.

Some of my subscribers actually thought I made a mistake when I made this call around London opening:

drforex > I think some more downside, today, tomorrow before somewhat of an uptick in currencies before easter weekend, wednesday NY and Thursday
:drforex > that if fed make 25 points and leave 'measured' in place or slightly adjust it

The point is that to do complete analysis, what i call relational analysis (or realtime analysis) you must consistently relate price (and price movement), time (elapse of) and events (discounting of). If you do this, well you are much less surprised by "funny" market moves.

Then, coming to think of it, I actually mainly based it on :

:drforex > OK, based on very rudimentary application of fractal geometrics, today is likely to be also pretty volatile
:drforex > i.e big moves, in this case probably further south ...

[graemenash]

Higher interest rates make dollar-denominated assets a better-yielding investment, hence the buying of dollars whenever it seems like US rates are heading up.

The USD rally was not caused by this rate hike however, as that was already priced in. What made people rush into the dollar was the hawkish tone of the accompanying statement which suggested a quicker pace of rate hikes to come, even though the fed left in the word "measured" this time.

[Fatman in the H]

One more to add to this.


Increasing interest rates mean that the US economy is expanding, along with increasing inflation as shown by the last few CPI numbers. The rate hike is used to try to control inflation and keep the economy "expanding" at a steady pace and not expanding quickly so that it builds up steam and expands out of control. This can cause major problems with inflation etc.

So an increase in rates and increase in inflation SHOULD mean that the economoy is expanding, and this SHOULD be good for the USD, and they increase rates to hold its growth.

At least thats my take on it??

[Nonpiker]

Inflationary pressures also could lead to US treasury liquidation due to the fact that holders feel the Fed is behind the curve. This is anything but dollar positive. The initial move was to buy dollars but we will really need to see how the debt holders react. Just remember the first reaction is not always the right one...

[olimits7]

Thank you for all your replies. I have a better understanding of what interest rates do to the economy.

The reason I asked the question before is when I looked under the Econoday economic calendar, and clicked on "why investors care" it said:

http://fidweek.econoday.com/reports/...tors_care.html

The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.

Why would they state the above knowing it's not the truth?


Thank you,

olimits7