High U.S. Interest Rates of 2.25% Putting Pressure on EURO
(By Glenford S. Robinson)
EUR/USD has fallen to an all-time low of 1.1409 as of this writing. In fact, this is expected because the European Central Bank (ECB) has continued to keep interest rates to 0% while the United States Federal Bank has steadily increased interest rates, which sits currently at 2.25%. Bond investors don’t like when a currency’s country has low interest rates because they get less return on their investments.
A country with a high interest rate pays more to investors than countries with low interest rates. So, one will find that the countries with the lowest interest rates are usually the countries that loses the battle when their currencies compete with currencies of countries with higher interest rates.
The U.S. Federal Reserve Bank has raised the U.S. interest rate to 2.25% because the U.S. economy has been doing well (expanding) and to keep the economy from overheating, the Fed is compelled to raise interest rate to try and slow things down.
Now it is more expensive for banks to barrow money from each other and as a result barrowing slows, which intern puts a squeeze on consumers who like to take out loans for purchasing goods and services. Now, these consumers are prevented from easily getting loans. Companies that provide goods and services for these consumers to purchase are now feeling the pinch because now their sales have fallen, which directly affect the share price of their stocks on the stock market. This is the reason why the stock market does poorly by dropping to extreme lows when the interest rate is high.
The EUR/USD currency pair has fallen on hard times because investors and traders alike are selling the EURO and buying the USD. To be clear, the investors and traders who are selling the EURO belong to the professional or institutional trading category of traders, such as your investment banks and hedge funds. In fact, your average Forex retail trader is definitely not selling the EURO; he/she is buying it. This statistic is evident in the retail sentiment released by retail brokers who actually trades against retail traders who are trading on their platforms. This is also the reason why 95% of retail traders lose.
So, how far will the EUR/USD currency pair fall before there is a reversal? A reversal will occur when retail traders begin to close their long positions. This is when professional traders will initiate a reversal by steering the ship upward again away from the direction of retail traders’ sentiment. This is the only way the investment banks and large hedge funds and other large funds make money. They take money from the retail trader who trades in the opposite directions from them.
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I am a Clinical Lab Scientist, entrepreneur, investor and trader (stocks and Forex). I enjoy writing and publishing articles online.