Interest rates – will they ever rise?

The Bank of England in Threadneedle Street, Lo...

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UK Interest rates have been held at 0.5% for 27 months now. This is astounding given that inflation is around 4.5% now, 2.5% above the Bank of England's target of 2%. And yet, even after the last MPC meeting we still see no sign of change. Economist have noted that a fall in inflation did occur in March, however, the BOE's quarterly report (11th May) was pretty hawkish and this was followed by further warnings from the OECD that rates will have to rise this year to avoid an 'embedded' inflation situation.

The economy in the UK is showing no strong signs of recovery (tongue in cheek) with GDP growing by a meager 0.5% and last factory orders announcement showed the first drop in 2 years. With the MPC still showing a majority for no hike, it might be a while before we see any changes. The top hawk Andrew Sentance, who has called for rises since the summer, voted again for a 50-basis point rise to 1% in May the fourth month he has done so, however, this was his last vote as he will be replaced by GS's Ben Broadbent, who is considered less hawkish. On the other side of the scales Adam Posen continues to call for more money printing.

So, what do this mean to us as day to dayish traders? Well, both the Euro and the USD are not in a much better position so it's difficult to take even a medium term view. The Euro can start a mega decline on any further bad news out of Greece, and the other PIIGS, the US jobs data is not good and the stock market is slowing down and declining. Overall, for us the best we can do is use our tried and tested Forex trading systems and methods, go for low risk game plays and simply take a reactive stance. Although there is a correlation between risk and USD buying take a look at the weekly charts below, Dow futures and Euro and spot the difference. The risk aversion pattern seems to work out well in intraday trading, particularly when US news is not awful. Often you will see a bad US figure knocking equities and weakening the USD, only to turn very quickly and USD buying ensues.

So, bottom line is, I prefer the scalping methods that we always use and avoid the swings, unless the scalp becomes a swing naturally.

Have a good trading day and feel free to contact me if you have any trading questions to ask.



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1 comment to Interest rates – will they ever rise?

  • It’s too bad that Euro is still passing through that bad sentimental analysis related to the Greece situation. Let’s hope for a better situation there.

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