Interest Rates

Hi, I'm still trying to get my head around interest rates affecting currencies. If the BOE cuts interest rates what affect (if any) do you think it will have on - GBP/USD

Does it mean the pound will become weaker therefore making USD stronger which means I should put in a sell order on this pair? if I have this correct what affect would it then have on the USD/JPY (if any)

many thanks

(i'm still waiting for my trading books to arrive from amazon so please bear with me if I have got it wrong)

montpro said:

Hi, I'm still trying to get my head around interest rates affecting currencies. If the BOE cuts interest rates what affect (if any) do you think it will have on - GBP/USD

Does it mean the pound will become weaker therefore making USD stronger which means I should put in a sell order on this pair? if I have this correct what affect would it then have on the USD/JPY (if any)

many thanks

(i'm still waiting for my trading books to arrive from amazon so please bear with me if I have got it wrong)

Click to expand...

Hi Montpro,

Basically, the answer to your question is yes if you are simply talking about hot capital flows.

However, things aren't that simple as you should also consider

1. Inflation rates
2. Balance of payments and effects on exchange rates

I can't see Cable falling much below 1.95.

If I were you I would wait and go long at around that level as dollar is destined for big falls unless government tackles, budget and balance of payments twin defecits.

Given you are just starting out I'd strongly recommend you open a demo account and learn your fundamentals and technicals before placing money on the table.

Best regards...

Too late, I'm a fully paid up loser (but i like to call it 'my investment in learning' money - especially when trying to explain the loses to my wife). I have a new strategy now which seems to be better.

so why not go short now then long when it reaches that level?

and why do you call it cable?

Montpro,

Cable is so called because in the early days, trading in £/$ between the UK and US was transmitted via a cable under the Atlantic.

Can't help with the other questions, I'm afraid but I'm sure my good friend Mr Atilla (or Mr Jammer)can.

Grant.

montpro said:

Too late, I'm a fully paid up loser (but i like to call it 'my investment in learning' money - especially when trying to explain the loses to my wife). I have a new strategy now which seems to be better.

so why not go short now then long when it reaches that level?

and why do you call it cable?

Click to expand...

In a simple answer, the trend is your friend and the trend for GBPvUSD is up. Gold is up and Oil is up and dollar is down. So whilst there may be little blips you should trade in the direction of the long term trend.

Based on my 4 hour charts I'd say next move is down perhaps to 1.98 before support kicks in. If that fails then it would be 1.95 I'd guess.

Will I trade? No. Because I prefer to trade the DOW.

Howerver, you should always do what's right for you.

Good luck.

This discussion seems to have forgotten to include expectations in the whole thing. Is the market expecting the BOE to cut rates? If so, then when that happens there probably won't be much reaction. The question then becomes one of if further cuts are coming, and if so how much.

exactement rhody-generally by the time it comes to the actual decision most of the expectation is already priced into the markets. it's only when things happen out of the blue like back towards the end of 06/start of 07 when the MPC started tinkering unexpectedly.

in general yes-if the MPC cuts rates then sterling weakens, vice versa if they hike.

fyi it looks as if we're beginning to price in a 25 cut for this week. could be a fairly hairy build up actually although not judging by today's action!

montpro said:

. . .
If the BOE cuts interest rates what affect (if any) do you think it will have on - GBP/USD
. . .

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The interest rate is the price of money
Lower the price (ie cut rates) and demand goes up.

A Dashing Blade said:

The interest rate is the price of money
Lower the price (ie cut rates) and demand goes up.

Click to expand...

so you think if MPC cuts rates on Thursday sterling will strenghten?

gooseman said:

so you think if MPC cuts rates on Thursday sterling will strenghten?

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Depends on your time-frame.
I fully appreciate that day-traders would claim that "it's already priced in".
My point is that if you cut the price of something then demand can normally be expected to rise.

My point is that if you cut the price of something then demand can normally be expected to rise

Click to expand...

Another view is that if you cut interest rates then the return on your money is less for investment purposes and as such the demand is likely to drop.


Paul

gooseman said:

so you think if MPC cuts rates on Thursday sterling will strenghten?

Click to expand...

Technically, yes! If interest rates are low people will bring forward their consumption patterns. They will borrow to bring purchase decisions forward and so demand for money will increase.

That is within the UK. When you say Sterling you are talking about foreign transactions. That is different to the demand for money at domestic level.

Here are some additional considerations if you want to work out what really happens.

£terling $ollar
r% r% Interest rates
i% i% Inflation rates
e e Exchange rates
M M Imports
X X Exports
G G Goverment Exp (Budget +ve/-ve)
T T Taxation
S S Savings
I I Investment
BoP BoP Balance of Payments

Then you can work out movement on cable...

Taking it down to simple Supply and Demand based on a single interest rate is likely to lead you astray.

Any government will have a model of the their economy with all these parameters coupled with some Domestic Expenditure, Income and Production stats not to forget productivity and unemployment figures that will crunch the numbers on a super algorithm to give you the elasticity of demand for money based on interest rate changes and likely outcome.

As for trading direction I think it's simpler to use Technical Analysis. IMHO. :whistling

Atilla said:

Technically, yes! If interest rates are low people will bring forward their consumption patterns. They will borrow to bring purchase decisions forward and so demand for money will increase.

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And of course the demand for money is met by increased lending, which mean more money in the system (higher money supply growth), which eventually translates to inflation.

agree that it is the price of money however it dpends if there is net borrowing or lending. look at carry trades to see the recent effect of interest rates on currency rates.

not a coincidence that when uk was hiking gbpeur hit 1.50+

A Dashing Blade said:

The interest rate is the price of money
Lower the price (ie cut rates) and demand goes up.

Click to expand...

Apols guys, just realised I'm talking b0ll0x
(not for the first time, prolly not for the last :cheesy

Increase rates in say GBP makes it relatively more attractive to switch (say) from EUR deposits to GBP deposits, ergo GBP rises vis a vis EUR