Interest Rates

Hi All,

I’ve been reading babypips and I’ve enjoyed it , I’m on the interest rates part and I don’t quite understand it.
If I was looking at eur/usd and euro cut their interest rates would I look to go long or short?

I know that a cut in interest rate boosts the economy but yesterday night (28/01/15) the yen cut theirs and usd/jpy went up …so I’m not sure.

If anyone could help I’d appreciate it thanks :slight_smile:

Hi TJMC,
regarding the interest rates, the central bank cut the interest rates in the economy to boost inflation and growth and if they eases their monetary policy that is negative for their currency as indirectly they are doing easing in their economy to achieve their target inflation and growth just like BOJ did and it impacts the currency in negative way that is why if euro zone also does the rate cut, it will impact negatively to euro and you should go short on it. while i must tell you there are already expectations for more quantitative easing in euro zone which is ultimately going to impact euro negatively making divergent monetary policy outlook more prominent between euro zone and US

In theory if EUR cut the interest rates than EUR should lose on its value. However, that doesn’t give us any guaranty that EUR will foll down because forex market is very unpredictable and you will never know which way it will go.

It also depends on why they cut it and if the market had expected this, in which case it may barely move. Also, if it cuts by more/less than the market expected, this would have an effect - if market expected a 0.50% cut but only 0.10% materialised, there could be a very strong reaction against it.