How to predict interest rate movements


tickmill
tickmill
tickmill

When you start to trade in forex, knowing the interest rates of various currencies is like breathing air: it’s essential. Your decision to purchase a currency is based on whether you think its interest rates will rise so you can make a profit, and you will sell if you foresee interest rates going down. Interest rate movement is largely influenced by economic data such as inflation. Often, a reserve bank will raise rates if it needs to stem inflation, but there may also be other market factors at play.

Right now, for example, the US is embroiled in a trade war with China. Rather than flee the US dollar, investors are more concerned about the impact on commodity currencies. As a result, many weaker currencies have become even weaker – interest rate hike or not. This is due to traders abandoning weaker currencies given the global uncertainty that could be brought about due to trade wars and opting for safe-haven currencies such as the dollar.

Using fundamental analysis to help with rate predictions

To predict what the euro will do versus the dollar, start by comparing the economies of the Eurozone and the United States. It is almost a certainty that the currency of the country that is doing better will rise. If, for example, data indicates the European economy rose by 0.7%, while the US economy increased by 2.1% during the same time, the US dollar is the stronger currency. You’d expect the euro to decline against the dollar. To make money off this decline, you would therefore sell EUR/USD.

Using technical analysis to help

This is not complicated. You must watch the indicators and draw trend lines. It is as important to forex as it is to stocks, and it is also indispensable when you learn how to trade CFDs. Trends feed into numerous strategies. As you likely know by now, a trend is when there is movement either up or down on your chart. There can be an uptrend or a downtrend. The fundamental premise is to buy at low levels but sell at high ones.

This brings us back to our trends. An uptrend is when the price sets a series of higher lows and higher highs, so your line or curve can only trend upward. A downtrend is the opposite – the price forms a series of lower highs and lows.

When carrying out your chart analysis and drawing trend lines, you know it’s a downtrend when you connect two consecutive highs with a descending line. In other words, when going from one high to the next, the line descends. The beauty of technical analysis is that it also allows you the foresight of seeing when the price is definitely reversing down, and that is when the third high continues a descent. You now know you can sell and can close your trade by the fourth or fifth high.

What kind of analysis should you use in which cases?

You might now be yearning for forex advice clarifying whether you should use technical or fundamental analysis. There are traders who immerse themselves in economic news and data, whereas others feel they only need the price charts. There are advantages and drawback to both, and rarely will one kind of study give you the comprehensive picture. The best traders know to combine the strengths of each kind of analysis to minimize the risk of error. To this end, you could buy or sell with the help of economic analysis and then determine the best levels for entering a trade using your broker’s technical tools. If anything, this will increase your chances of profit-taking.

tickmill
tickmill
tickmill
tickmill
tickmill