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Interest rates, interest rates. This seems to be everything everyone with any skin in today’s financial market ever cares about. With the whole world shifting uncomfortably in their seat whenever a rate hike review is due from the Federal Reserve, this almost obsessive focus on this seemingly arbitrary number feels a little crazy for the uninitiated.

After all, what can one little percentage point really do?

The concept of interest rates dates back to ancient Mesopotamia around 3,000 BC, where loans were made and interest was charged in the form of a commodity, like grain or silver. However, it was the ancient Greek philosopher Aristotle who first noted the idea of interest, albeit with skepticism, considering it unnatural.

Fast forward to the Renaissance, when financial minds like the Italian mathematician Leonardo Fibonacci began to formalise the mathematics behind interest rates, setting the stage for modern economic theories. We still use the Fibonacci retracement as a technical analysis tool today.

In the modern economy, interest rates are treated as the “cost” of borrowing money. They influence consumer spending, business investments, and overall economic growth. The power of interest rates lies in their ability to steer the economy. Whether it’s cooling down an overheating market or stimulating a sluggish one, this little number wields immense influence.

So how profound is the influence of interest rates on the value of any currency? We can observe how interest rates fluctuate, almost in tandem to market movement. Why then, one might wonder, is it necessary for central banks review interest rates periodically?

And why should you as a forex trader care? 

The role of central banks in managing the economy 

Central banks change interest rates primarily to manage economic stability. Changes in interest rates can determine if the economy growth of a country is sustainable, as this in turns control inflation and achieves a stable financial environment.  

In the context of monetary policy, central banks can have varying attitudes in approaching inflation and economic growth. When describing the tone and content of speeches by central bank, two terms are commonly used: 

Being hawkish cools down the economy

Hawkish policymakers prioritise keeping inflation low, often advocating for higher interest rates and tighter monetary policy.

Their main concern is that high inflation could destabilise the economy, so they tend to act quickly and decisively to raise rates or otherwise restrict the supply of money. 

Being dovish heats up the economy 

Dovish policymakers are more concerned with unemployment and supporting economic growth. It is common to see lower interest rates and a looser monetary policy to stimulate borrowing and spending.

Dovish policymakers are more willing to accept higher inflation if it means encouraging job creation and economic growth. 

When hawkish and when dovish? 

To put it simply, a sensible central bank may start taking a hawkish stance when it perceives that the economy is overheating. Common signs that an economy is overheating would include rising inflation and asset price bubbles. As raising interest rates can make borrowing more expensive, a hawkish stance can potentially cool off speculative investments and reducing the risk of a market bubble. 

On the other hand, central banks tend to adopt a dovish stance when it felt the need to stimulate the economy. Recession periods, high unemployment rates and financial crises are the usual triggers. For instance, during the COVID-19 pandemic in 2020, central banks like the US Federal Reserve and the European Central Bank (ECB) slashed interest rates to near-zero levels and implementing quantitative easing to support their economies. 

A game of tug-of-war 

Whichever stance taken by a central bank, change is the only constant in any economy. This is the reason why central banks cannot go with a one-way street approach as it pleases, but rather review its approach periodically to tighten and loosen the monetary policy like a game of tug-of-war depending on the economy status at the given material time. 

Can interest rate solve all economic problems? 

It depends. While interest rates are key drivers in forex markets, the impact isn’t always straightforward. Delays in economic response, high existing debt and global economic conditions can lessen the effectiveness of rate changes.

Also, when rates are near zero, traditional rate cuts become less effective. Interest rates are also closely tied to other economic indicators like employment rates, inflation and GDP growth.  

As such, understanding how interest rates relate to these factors can provide deeper insights into potential currency movements. For forex traders, understanding and anticipating interest rate changes is essential for those who would like to trade on news, which can be very swift and lucrative. 

Trading opportunities arising from changing interest rates 

Interest rates are closely tied to other economic indicators like employment rates, inflation and GDP growth. Understanding how interest rates relate to these factors can provide deeper insights into potential currency movements.

Further, announcements regarding interest rate changes are typically times of high volatility in forex markets, quite like the nature of news trading. Traders can capitalise on this volatility if they can predict the direction of the market movement following an interest rate change. 

What if the central bank makes a poor decision? 

In short, it can turn into a situation of adding oil to fire. Not only there would be long-term economic challenges for the country, but everything from the stability of the currency to general living standards would be impacted. 

One of the classic examples would be Turkey and one of the biggest losers in the currency market, the Turkish Lira (TRY).  

Under the administration of President Recep Tayyip Erdoğan’s, the Central Bank of the Republic of Turkey (CBRT) has lowered interest rates despite soaring inflation. President Erdoğan has publicly advocated for lower interest rates, arguing that it helps to foster economic growth. 

The Turkish lira (TRY) has seen a sharp fall since 2018, depreciating between 80% to 90% against major currencies such as the US Dollar (USD), the Euros (EUR), Pound Sterling (GBP) and Japanese Yen (JPY). Foreign investors are spooked, and the purchasing power of Turkish people practically just evaporated into thin air.  

Opportunities for forex traders  

With an obvious trend from the CRBT, USDTRY and EURTRY are the most traded exotic currency pairs as traders can simply choose to short TRY.

Combined with the right trading strategy, technical analysis and risk management, both pairs can present a good trade setup for traders to seize some profits. 

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CURRENCIES

Key Highlights:

• Nvidia’s stock surged by 7% overnight, boosting its market cap to over $2.8 trillion, making it the third-largest company globally.
• The rally places Nvidia close to Apple ($2.9 trillion) and Microsoft ($3.2 trillion).
• Nvidia’s AI chips are crucial for advanced AI applications, driving high demand and significant stock price increases.
• Since surpassing the $500 mark at the start of 2024, Nvidia has seen rapid gains, recovering quickly from a late-March/early-April dip.
• Nvidia holds a 7.2% weighting in the Nasdaq 100, and its recent rally pushed the tech index to a new high.

US Dollar and Inflation:

• The US dollar is stable as traders await Friday’s Core PCE inflation data.
• US inflation remains high, impacting rate cut expectations for 2024, now with only one 25 basis point cut anticipated.
• Minneapolis Fed Reserve President Neel Kashkari stated that the central bank should wait for several months of positive inflation data before considering rate cuts, emphasizing the Fed’s focus on reducing inflation.

US Dollar Index:

• The US Dollar Index shows a slight downside bias.
• Initial support levels are 104.44 (200-dsma) and 104.37 (38.2% Fibonacci Retracement).

STOCK MARKET

Key Highlights:

• The stock market’s most critical driver, earnings outlook, continues to improve.
• S&P 500 earnings grew 6% in Q1 2024 compared to the previous year, with a 10% growth excluding Bristol Myers-Squibb’s poor performance.
• Future earnings estimates are rising: 2024 earnings growth forecast increased to 11.4% from 10.9% (as of April 5), and 2025 estimates up to 14.2% from 11.6%.

Strategist Insights:

• Jonathan Golub, UBS Investment Bank: Raised year-end S&P 500 target to 5,600 from 5,400 due to stronger earnings.
• Second-quarter earnings estimates are robust, supporting further market upside.

Earnings Growth:

• S&P 500 earnings show resilience and growth across various sectors.
• “Mega-Cap Growth and Tech” stocks grew about 39% year-over-year, maintaining strong performance.
• Earnings for Cyclicals and Defensives grew 7.5% in Q1 2024, indicating healthy growth.

Sector Performance:

• Nvidia contributed 37% to the S&P 500’s earnings growth over the past year, expected to drop to 9% over the next 12 months.
• Broader market participation expected with contributions from power, commodities, and utilities.

Market Dynamics:

• Cost-cutting has driven recent earnings growth; however, increased demand and revenue growth are anticipated to take over.
• Industrial sector companies signal a recovery in demand for the second half of the year, expected to improve operating leverage and margins.

Investor Trends:

• Charles Schwab’s Kevin Gordon emphasizes that revenue beats outperformed earnings beats in Q1 2024, indicating market preference for genuine demand-driven growth over cost-cutting.

Click here to open an account and start trading.

Dear Client,

Please note that the dividends of the following products will be adjusted accordingly. Index dividends will be executed separately through a balance statement directly to your trading account, and the comment will be in the following format “Div & Product Name & Net Volume ”.

Please refer to the table below for more details:

The above data is for reference only, please refer to the MT4/MT5 software for specific data.

If you’d like more information, please don’t hesitate to contact [email protected].

Dear Client,

Please note that the dividends of the following products will be adjusted accordingly. Index dividends will be executed separately through a balance statement directly to your trading account, and the comment will be in the following format “Div & Product Name & Net Volume ”.

Please refer to the table below for more details:

The above data is for reference only, please refer to the MT4/MT5 software for specific data.

If you’d like more information, please don’t hesitate to contact [email protected].

Dear Client,

Please note that the dividends of the following products will be adjusted accordingly. Index dividends will be executed separately through a balance statement directly to your trading account, and the comment will be in the following format “Div & Product Name & Net Volume ”.

Please refer to the table below for more details:

The above data is for reference only, please refer to the MT4/MT5 software for specific data.

If you’d like more information, please don’t hesitate to contact [email protected].

Dear Client,

Please note that the dividends of the following products will be adjusted accordingly. Index dividends will be executed separately through a balance statement directly to your trading account, and the comment will be in the following format “Div & Product Name & Net Volume ”.

Please refer to the table below for more details:

The above data is for reference only, please refer to the MT4/MT5 software for specific data.

If you’d like more information, please don’t hesitate to contact [email protected].

CURRENCIES

Gold Forecast:

• Gold (XAU/USD) dropped sharply on Wednesday, holding above support at $2,375.
• Bulls need to defend this level to prevent a deeper retrenchment towards $2,360.
• Continued weakness could shift focus to $2,335, the 38.2% Fibonacci retracement of the 2024 rally.
• A bullish reversal could push prices towards $2,420 and potentially $2,430.
• Overcoming $2,430 could lead to a rally towards the all-time high around $2,450.

EUR/USD Forecast

• EUR/USD declined on Wednesday, nearing key support at 1.0810.
• To maintain a bullish outlook, the euro must stay above this threshold.
• Losing this floor could lead to a retreat towards the 200-day simple moving average at 1.0790.
• Further weakness could spotlight 1.0725.
• A bullish turnaround could target resistance at 1.0865, intersecting with the 50% Fibonacci retracement of the 2023 decline.
• A successful breakout may aim for 1.0980, the March swing high.

USD/JPY Forecast

• USD/JPY rose on Wednesday, nearing horizontal resistance at 156.80.
• Bears must defend this barrier to prevent a climb to 158.00 and eventually 160.00.
• Advances to these levels risk intervention by Japanese authorities to bolster the yen.
• A bearish swing could find initial support at 154.65.
• A breach might lead to a descent towards the 50-day simple moving average at 153.75.
• Further losses could expose trendline support just above 153.00.

STOCK MARKET

Demand and Supply Issues:

• Nvidia (NVDA) CEO Jensen Huang faces strong demand but insufficient supply.
• Following Nvidia’s first-quarter earnings report, Huang addressed concerns about a potential demand lull amid transitions between AI chip generations.

AI Chip Transition:

• Nvidia is moving from its current Hopper AI platform to the advanced Blackwell system.
• Despite analysts’ concerns, Hopper demand has grown even after the Blackwell announcement.

Demand vs. Supply:

• Demand for both Hopper and Blackwell platforms will exceed supply well into next year.
• The complexity of Nvidia’s chips contributes to supply constraints.

Financial Performance:

• Q1 results topped Wall Street forecasts with adjusted EPS of $6.12 on $26 billion in revenue, marking a 461% and 262% increase from the previous year.
• Non-GAAP operating income was $18.1 billion.
• Nvidia expects Q2 revenue to be around $28 billion, exceeding analysts’ expectations of $26.6 billion.

Stock Split and Dividend Increase:

• Nvidia announced a 10-to-1 stock split, effective June 10 for shareholders as of June 7.
• The quarterly dividend increased to $0.10 per share from $0.04.

Market Reaction:

• Nvidia stock rose as much as 6% in extended trading on Wednesday.

AI Training and Inferencing:

• Huang discussed transitioning from AI training to AI inferencing.
• Nvidia’s chips are expected to remain powerful for inference due to their complex software stack and model capabilities.

Broadening Customer Base:

• Beyond major cloud service providers (Microsoft, Google, Amazon), companies like Meta, Tesla, and pharmaceutical firms are increasingly purchasing Nvidia chips.
• Automotive industry, excluding cloud companies, is a significant user of Nvidia’s data-center chips.

Future of Autonomous Vehicles:

• Huang highlighted Tesla’s lead in self-driving cars.
• He emphasized that all cars will eventually need autonomous capabilities.

Click here to open account and start trading.

Dear Client,

Please note that the dividends of the following products will be adjusted accordingly. Index dividends will be executed separately through a balance statement directly to your trading account, and the comment will be in the following format “Div & Product Name & Net Volume ”.

Please refer to the table below for more details:

The above data is for reference only, please refer to the MT4/MT5 software for specific data.

If you’d like more information, please don’t hesitate to contact [email protected].

Dear Client,

Please note that the dividends of the following products will be adjusted accordingly. Index dividends will be executed separately through a balance statement directly to your trading account, and the comment will be in the following format “Div & Product Name & Net Volume ”.

Please refer to the table below for more details:

The above data is for reference only, please refer to the MT4/MT5 software for specific data.

If you’d like more information, please don’t hesitate to contact [email protected].