Financial markets are looking at the US Dollar these days, the currency is expected to gain strength. Investors anticipate that the Federal Reserve Bank will increase the interest rate of the Dollar. This would definitely send the US Dollar higher.
What will the effect be on the dollar if the interest rate increases?
Generally, when there is an increase in the interest rate, the currency will appreciate. The higher US Dollar interest rate attracts foreign investors, they want to deposit money in the US, as they get a better rate of return from saving in US banks. Capital flows to countries with higher interest rates. This increases the demand for the given currency and strengthens the exchange rate.
Recently, the Federal Reserve of the United States has maintained interest rates near zero in order to stimulate the US economy. As a result of low interest rates, government and consumer debt has exploded to high levels. This situation might change in the near future.
What has happened recently?
Heads and other senior financial officials of the central bank of the United States held their annual summit in Jackson Hole, Wyoming between 25-27 Augusts. The Federal Reserve Bank of Kansas City’s annual Economic Policy Symposium is of key importance for investors, as it dominates the mood on Wall Street. The markets were looking for hints from Fed chair Janet Yellen regarding their monetary plans.
Members of the Federal Open Market Committee (FOMC), a committee within the Federal Reserve System that controls the nation’s open market operations, are divided on the timing of a rate hike. Some of them want to raise interest soon, while others are concerned about inflation levels below the target of 2%. The different opinions are based different economic data. For example, retail sales were weak in July. On the other hand, Fed Vice Chairman Stanley Fischer said that the Fed was close to its aims of a full labor market and the inflation target of 2 percent (although US inflation levels are closer to zero than 2%).
The rate debate might be resolved now, as Fed Chair Janet Yellen said on the meeting: “the case for an increase in the federal funds rate has strengthened”. The projected Fed rate hike is reinforced by similar statement of Vice Chair Stanley Fischer.
The Fed must set rates at its policy meeting in September. Policymakers will examine upcoming economic releases, such as employment and inflation numbers.
The rate hike speculation is reinforced by the summit. Financial markets are now pricing in a 59.8 % probability of a rate hike before the end of 2016, up from 37.3 % in July.
How can binary options traders use this opportunity?
Binary traders should watch the exchange rate development of the US dollar in the next few weeks, they can make nice profits using the rate hike of the currency. When the Fed decides the increase, traders need to analyze the charts carefully and push the “Up” button when the time comes.