Interest Rates and Trends

A look at the daily chart of the EUR/USD with one year of trading shows something that we haven’t seen in this pair recently. This chart shows that the currency pair is in a range bound environment. The market is trading within two similar price levels that have been offering support near the bottom of the range and offering resistance near the top of the range.

The reason is a possible changing interest rate environment. We know that higher interest rates usually lead to a higher currency value while lower interest rates usually lead to a lower currency value. With the US Federal Open Market Committee lowering interest rates in the US as the European Central Bank (ECB) was raising or leaving them unchanged, we saw that this pair had been in a strong uptrend for close to two years.

But now we see that there is some talk by ECB members of a changing bias that could result in them lowering rates in the near future. This means that the move by the EUR/USD up through the 1.5000 level may be on hold until traders get a better idea of the interest rate environment going forward. If the ECB raises rates, that might be enough for the market to break out to the upside.

EURUSD Daily Chart

If the ECB lowers rates, we might see a break down through support and a trend change to the downside similar to the GBP/USD daily chart. The best place to keep track of this is at www.dailyfx.com, where you will find analysis devoted to the FX markets and the latest on Central Bank moves and meetings. Live clients at FXCM have that same information and more at DailyFX+.

So rather than waiting for the breakout in either direction, follow these sites to keep track of the fundamentals of the markets to put yourself in a better position to anticipate the direction and the timing of the breakout.