A rumor goes around on the forex market. The ECB is to think aloud about the introduction of a negative interest rate. The key interest rate has just been reduced to a spectacular value of 0.25%. In the rise of this rumour, the price of the euro reacted strongly. He fell to a low of 1.3453 dollars. What does that mean? How does it work? What’s the effect? What effects can the whole of my whereby have? Questions to be investigated in the following text.
The determination of a key interest rate is part of the monetary policy of the central bank. It is an economic policy measure. Key interest rates counteract inflationary or deflationary developments in prices. Interest rate cuts are intended to counteract deflation. If the economy and the citizen no longer have money in their hands to invest, banks do not lend any more for it, the demand drops and prices fall. In the worst case, costs can no longer be covered and there are bankruptcies. Unemployment rates are rising and a downward movement for the economy is consolidating.
In such situations, central banks are thinking about negative interest rates.
How does this work in practice?
The banks get large amounts of money made available. Instead of giving it as loans, they secure the money as a deposit with the central bank. The money is missing from the economic cycle. Therefore, the deposit rate could be negative. The banks would in fact pay a penalty and should be encouraged to grant loans. However, it is necessary to find an instrument that the banks do not repeat this punishment with their customers in any other way. That would make the effect that you hoped for would evaporate. The opposite would happen. Investors like private individuals would have even less money to increase demand and the price decline would be increased.
Fundamental analysis Indicators
The small reference to negative effects shows how well-founded such a decision must be and that it could also have an impact on policy and its legislation. For this reason, further information on the trader’s fundamental analysis is important. For example, would the policy be willing to intervene in law? What does the forecast for the economy look like? Information is provided by the Ifo index. How does the money supply develop? How do the unemployment figures develop and so on. If a central bank thinks about such a move, it means that the economy could weaken. This has an impact on the value of the currency. The value decreases. The trader can plan according to his decisions. If the measure takes action, the trend will experience a reversal. If it does not, the price decline continues. Therefore, the trader must make a well-founded analysis in order to decide correctly.
Negative interest rate and whereby – the trader’s tactics
No one can be clairvoyance. The mere fact that the consequence of the rise of the rumour was a day-low shows the direction in which the course can go, should such a decision be proclaimed. Tracking the Daily News and developing important fundamentals can indicate whether such a decision is in space and determine the trader’s trading on the day of a central bank meeting. But there is always a big risk. therefore provide sufficient margin and sit at the computer at the time of the session, so that worse can be prevented in an emergency. After the decision, the reaction of the money houses must be observed. If more loans are sufficient, the target can be reached, the measure takes action and the currency becomes more valuable again. If this does not happen, then a downward trend will probably not be halted.
To sum up, the decisions of the central banks almost always have an impact on the short-term price development and, to a large extent, also on the beginning or end of a trend. However, in order for the trader to make the right decisions for the selection of the currency pair, the bye or sell decision, and the investment sum, he must necessarily draw other fundamentals into the decision-making process. Only in this way can he trade profitably and exclude risks. If a central bank decision is really to be made for negative interest rates, that is not a good sign for the moment for the value of the currency affected.