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US Federal Rate cut has come and gone, Now What?

Now that the Federal interest Rate cut has come and gone, what other factors are there that could cause havoc on financial markets before the next Fed rate decision. Well, there are a few things that worth noting that are currently influencing the direction of financial markets. A list of these things is the US-China trade war, the current price of Gold, Chinese Yuan, US dollar, 10-year yield and last but not least, the current price of bitcoin. How do those things mention affect the current price of the EUR/USD currency pair? These are the things we will be discussing in this article.

A day following the US interest rate cut decision on Wednesday, this past week, president Trump issued a statement stating that he would raise tariffs on Chinese goods by 10%. That statement caused a further decline of the EUR/USD currency pair that was already reeling from a 25-basis point interest rate cut that sent the pair sliding more than 100 pips (1.1163 to 1.1028).

The price of gold has certainly benefitted from the US-China trade war, hitting a six-year high of $1,510. When there are uncertainties in the US dollar and global economy, investors look for safe-haven asset classes to stash their cash. Gold is one of those safe-haven asset classes that investors turn to during times of trouble. In addition, the price of gold is inversely proportional to the price of the US dollar. This means that whenever the price of gold goes up, the price and value of the US dollar goes down. So, as currency traders who trade the USD against other currencies, we should all understand the relationship between the USD and AUX (Gold).

The Chinese Yuan has taken a beating since the trade war restarted by president Trump last week. The Yuan has fallen so fast and so low that Washington has accused China of currency manipulation. The release of such accusation also caused the currency market to react strongly, which caused volatility to increase. Recently, China fired back implying that the country is not purposely trying to undermine the value of its currency for the sake of being competitive, but instead the country is trying to stabilize its currency for it to stand on its own accord against the US dollar and other currencies.

The United States Federal Reserve has finally cut interest rates, after more than 10 years since the last interest rate cut in 2008. As expected, and has we have accurately predicted, the rate cut was imminent and very necessary to thwart falling inflation rate.  With falling inflation rate, the economy was perceived by the Feds to be in dangerous territory.

Investors and some Forex traders were predicting that a 50-basis point rate cut was going to take place, but that did not happen. As a result of that, the USD initially became stronger on the day of the rate cut and the day following the rate cut, sending the EUR/USD plummeting to well over one hundred pips. Why did this happen? Well, investors and traders who were expecting a 50-basis point rate cut was disappointed; and as a result, started buying the US dollar thinking that a 25-basis point rate cut was not sufficient to slow down a falling inflation rate.  This was the initial reason why the EUR/USD fell so sharply. The secondary reason last Thursday, the day following the interest rate cut decision was Mr. Trumps threats and promise to raise tariffs by 10% on Chinese goods entering the country.

The other group of traders who were expecting a decline of the USD following the interest rate cut decision was in for a surprise. Many of these Forex traders had to resort to account value-preservation strategies and some down right had to cut losses to preserve capital. A 25-basis point rate cut is usually a negative action against the currency of the central bank performing the cutting. So, some traders had expected an increase in the EUR/USD currency pair following the 25-basis point rate cut, but this was not to be. The main point to be taken from this is that the Forex Market is a dangerous place to play if you don’t understand the game. Once this Forex game is understood, life is smooth sailing.

A point worth making is that the more the US Federal Reserve cuts interest rates, the more global economies will cut their interest rates to remain competitive with the US economy. In regards to China, China wants to be like the US in terms of economic strength and prowess according to experts. There is a winner in all this interest rate cutting parade. Yes, the stock market otherwise known as the equities market rises when there are interest rate cuts and anticipated rate cuts in the US and abroad. So, in a sense, rate cuts are looked at in a positive light to a certain extent.

The yield of the US 10-year Treasury note dropped like a bad habit well below 1.6%, influencing an uptrend in the US equities markets and cryptocurrency markets. The S&P, Dow Jones, and Nasdaq all rose significantly since the restart of the US-China trade war. Bitcoin the world’s leading cryptocurrency took off upward towards the moon as if it had received orders to land on Mars, leaping from the upper $9,000s to well over $11,000. The US 10-year yield is a barometer used to measure the current state and health of the economy, with high yields signifying strong economic growth and a healthy economy and low yields signifying the opposite.

So, this is where the United States economy is right now: low state of health, economically. What does this mean? It means that the federal reserve could possibly cut rates again in September to further boost economic growth, which will hopefully jump start the economy. This will be another icing on the cake for the stock market and another detriment to the US dollar. High yields cause the US dollar to become stronger (high value) and low yields causes the US dollar to become weaker (low value) when compared to other foreign currencies.

The Euro cannot take advantage of the obvious weakness in the US dollar because it too is very weak, sporting an interest rate of 0% and having a Eurozone economy that is on the brink of resorting to a negative interest rate policy. This is further indication that the global economy will also lower interest rates every time the US Federal Reserve cuts interest rates. In fact, major European equities markets have begun to do well. As early as this past Wednesday, August 7, the European stock market closed higher than it did three days prior.

Forex Traders should expect high levels of volatility leading up to the next Fed rate decision coming in September. It is best to stay on the side lines and out of the Forex market during the interest rate decision announcement in September, then join the market after a confirmed direction has been developed.

Disclaimer: Mstardom Finance and its parent company Mstardom, Inc., and writing staff do not provide investment advice. We are not investment advisors. All information shared in this article should not be taken as investment advice. Trading the Forex market is highly risky due to the high level of leverage required; therefore, Forex traders could lose all deposited funs in their Forex account.

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