Federal Interest Rate Decision, What Does It All Mean?
In this issue of the Celestial Trading Tools Educational Blog we will be taking a look into the upcoming Federal Interest Rate Decision on the evening of Wednesday 18th of September 2019.
This rate decision is expected to be released around 7:00pm GMT.
What is the Federal Funds Rate?
The Federal Funds Rate is essentially the US Central Banks interest rate for the country. Interest rates affect nearly all of us and are essentially a charge on any money you borrow or save. If you borrow money you must pay the money back plus the interest rate over the time you borrowed. If you are saving money, then you receive extra in line with the interest rate for the time you saved.
Although within forex we don’t tend to view interest rates in such a linear and single use fashion. The Federal Funds rate is a universal rate at which banks can borrow money from the US Central Bank. Therefore, if they are unable to borrow as much, they are unable to lend as much and so savings rates are also cut to compensate for this.
If the interest rate is cut from 2.25% to 2.0% the high street banks are not going to want to still be paying you 2.25% on your savings accounts when they can only borrow with a rate of 2.0%!
This therefore gives us as traders an indication into how strong or weak a currency is. Typically, the higher the interest rate the stronger the currency, at least with all major currencies this is true.
This evening a rate decision is upcoming within the US, the result of this rate decision will cause a fluctuation within the market and may change the perceptions of many traders depending on the result.
Currently the base rate is 2.25% in the US, however it is forecasted that this will drop to 2.0% this evening. If indeed that does happen, we will see the USD drop in strength and so any pairs crossed with the USD will move higher, e.g. EURUSD and GBPUSD.
If the rate decision remains constant at 2.25% then we are more than likely to see a small push higher in the USD, although this rate has not been inflated, it is higher than expected and so traders will need to adjust their expectations. This will cause pairs crossed with the dollar to drop. E.g., EURUSD and GBPUSD.
Any rate decision below 2.0% which is unlikely will cause a much larger drop in strength for the dollar, and any decision above 2.25% again unlikely will cause a much larger gain in strength for the dollar.
Hopefully you now have a better understanding on how interest rates affect the forex markets and what you can expect from this evenings Federal Funds Rate decision.
We hope you found this issue of the Celestial Trading Tools Educational Blog interesting and informative and we hope to see you reading future articles very soon!