Interest rate effect

How interest rates affect: Individuals, Businesses & the Stock Market?

Interest Rate Effect

Once Janet Yellen ended the QE program of the US dollar, Interest rate hike as a topic started to be the most popular topic on the investors tables. Interest rate effect is a dilemma for everyone because it affects every single part in the economy directly so, reactions are interchangeable, mixed and must be well-understood to know where is every local currency is moving. Basically, Interest rate is the cost someone pays for the use of someone else’s money

Away from complicated details, I will simplify the effect of this important term through the following explanation

Inflation Definition and Impact

Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money.

Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum.

Interest rate adjustment is one of the powerful tools which is used to control the inflation/deflation by the central banks

Interest Rate Effect on Individuals

Individuals are divided into two major types:

  • – Money Owner (individual who has extra money amount to invest or to save)
    • Increase in interest rate for this type of individuals mean the followings:
      • – Saving money (especially in banks) becomes much favorable for the majority of investors. Banks saving accounts, treasury bills and bonds offer competitive returns with lower risk if compared to stock market returns. Everyone knows that stock market is a high risk market.
      • – Lower spending desire because, money-saving is much tempting
  • – Money Needy (individual who has no/low money fund to get his/her needs and demands)
    • Increase in interest rate for this type of individuals mean the followings:
      • – Banks loans, credit cards, credit allowances and mortgage are much expensive
      • – Lower spending desire because, cost of borrowing is higher and less income available

Interest Rate Effect on Businesses

Businesses have different types too however, the effect of interest rate can be explained as follows:

  • – Businesses have 3 majors areas that are directly affected with interest rate increment
    • – Lower demand on their services and products driven by lower spending behavior from individuals
    • – Lower demand on the business services and products means lower profits for the business and lower returns on their stocks too. Then, stock price falls affected by the lower returns.
    • – Higher interest rate means higher borrowing costs for the businesses. Usually businesses borrow to expand and develop their sizes and operations. Higher interest rate will eliminate the business from expansion and growth.

Interest Rate Effect on the Stock Market

Stock market is directly affected with interest rate as follows:

  • – Stock market is the interaction area between the investors and the businesses. Higher interest rate will affect the businesses as I’ve mentioned above and this will push the stock prices lower. When stock prices are lower, this means that the whole market declines and its index(es) fall. Investors want appreciation for their equities overtime and falling stock prices and indexes will threaten their equities appreciation and lower their desires to invest in the stock market.

Question: Higher interest rate is a stock market killer?

The answer is: BIG FAT NO!

However, Interest rate is a correction flag for any stock market and it clearly means that a major correction might be coming in the near future, keep your eyes opened!.

What is important to know is that: Quantitative easing and low interest rate encourage investing in stock market and usually, the stock market indexes make new highs during the low interest rate periods and QE programs implemented by the governments. But, This does not mean that with a higher interest rate, you must sell your stocks.

There are other important factors affect the stock market so, do not panic. Corrections and consolidations usually happen every year.

What’s important is to watch the economic data releases to see how the economy of a specific country performs and based on this, you can sell and buy stocks.

Remember to keep sharing the useful knowledge

GBP/USD Forecast: Mixed trends

GBP/USD 22nd, April 2015

GBP/USD Analysis

GBP/USD (currently at: 1.5025) seems to be attractive for the buyers. I am changing my technical look to this pair for a while.

The BOE is not behind this move, the US dollar is weaker against sterling pound and it is clear that this weakness is the main reason behind what is happening. BOE is watching the inflation of England and we’ve to wait till things become much obvious.

My technical overview has a limited change and I can see that there is limited uptrend and this is a reason to buy GBP/USD with caution. I recommend buying this pair around this level (1.5000-1.5030) only and it is recommended to use small stop-loss because it might fall hard again in any time. We can buy GBP/USD and watch these resistance levels: 1.5185 and 1.5429

The GBP/USD has the following major resistance and support levels:

  • RESISTANCE: 1.5429
  • SUPPORT: 1.4334

Breaking these levels in any direction will take us higher or lower.

My Daily BUY/SELL advice (30 pips stop-loss applied):

  • Sell: at 1.5395 – Take profit 1.5295 (100 pips profits)
  • Buy: at 1.5050 – Take profit 1.5120 (70 pips profits)
  • Buy: at 1.5020 – Take profit 1.5070 (50 pips profits)
  • Buy: at 1.5000 – Take profit 1.5100 (100 pips profits)

This review is valid during trading week: 22nd-24th April, 2015

EUR/USD Forecast: Downtrend in control

EUR/USD 21st, April 2015

EUR/USD Analysis

EUR/USD fell again after another test to 1.1050 range and found a minor support around 1.0655. The uptrend is very limited and the trading range too. I am expecting EUR/USD to keep on sideline moves in the next 2 days with a trial to test the resistance line around 1.0950, I am still not recommending to trade EUR/USD really till things become much trendy but, if you’ve to do that so, Selling is your only option (~Watch resistance levels closely).

The EUR/USD still has a minor support at 1.0459 and it tested it once, I am still expecting another test to this support level. Greece’s smoke is still there and it feels like this story will never end. Watch out your steps because the EUR is ready to fall again in no time!

The EUR/USD has the following major resistance and support levels:

  • RESISTANCE: 1.1055
  • SUPPORT: 1.0459

Breaking these levels in any direction will take us higher or lower.

My Daily SELL advice (30 pips stop-loss applied):

  • Sell at: 1.0940 – Take Profit 1.0890 (50 pips profits)
  • Sell at: 1.0910 – Take Profit 1.0850 (60 pips profits)
  • Buy at: 1.0650 – Take Profit 1.0750 (100 pips profits)

This signal is valid during trading week: 21st-24th April 2015

Gold Forecast April

Gold Forecast: XAU/USD is heading down

XAUUSD Forecast 20th April, 2015

Gold (currently at: 1202 level) after a false breakout to 1220 level, it fell after touching 1224.45 level to find a minor support around 1183.36. The 1220 level is still a strong resistance to test one more time and due to the false breakout, we’ve to add extra pips to the current resistance to make sure that we will not lose any pips. After revising my chart, I can suggest to raise our resistance to 1235 level.

I recommend that you hold on for a while and do not open long positions for the gold, buying gold in this area seems to be a little bit dangerous (& if you do that, take profit quickly) especially that uncertainty is blurring the trend. I am still waiting for the gold to fall sharply this time before picking the right point to buy.

The GOLD (XAU/USD) has the following major resistance and support levels:

  • RESISTANCE: 1235
  • SUPPORT: 1076

Breaking these levels in any direction will take us higher or lower.

My Daily BUY/SELL advice (50 pips stop loss applied):

  • Sell: at 1210 – Take profit 1110 (100 pips profits)
  • Sell: at 1230 – Take profit 1130 (100 pips profits)
  • Sell: at 1160 – Take Profit 1090 (70 pips profits)
  • Buy: at 1080 – Take Profit 1180 (100 pips profits)

This review is valid during trading week: 20th-24th April, 2015

USD/JPY Forecast: Strong selling pressure around 119.10

USD/JPY 17th April, 2015

USD/JPY fell again after testing strong resistance around 120.80 level, it moved back and forth during the last 2 weeks but, this time moves were not easy and the trend was not clear. Although, the same inner voice I’ve talked about in this post is still telling me that uptrend will resume soon. We will stop talking about these strong resistance levels: 120.80 or 122.02 for a while till USD/JPY finds a strong support. Based on my current analysis, I can see that we have 2 strong support levels around 116.60 and 117.50.

Non-farm payroll data was a real shock for the market watchers after expecting strong numbers, the weak numbers stressed on the market worries related to the timing of the rate hike and whether the economy is ready for it or not. Over all, it is too early to judge whether this weak NFP data is just a random fall or it is a new trend for the employment in united states. We’ve to wait for April’s report.

The USD/JPY has the following major resistance and support levels:

  • SUPPORT: 117.50

Breaking these levels in any direction will take us higher or lower.

My Daily BUY/SELL advice (50 pips stop loss applied):

  • Sell: at 119 – Take profit 118.25 (75 pips profits)
  • Buy: at 116.90 – Take Profit 117.90 (100 pips profits)
  • Buy: at 117.60 – Take Profit 119 (140 pips profits)
  • Buy: at 118.20 – Take Profit 120 (180 pips profits)

This review is valid during trading week: 20th-24th April, 2015