The Fed raising interest rates means it will be more attractive to use the US dollar instead of other currencies. Domestic funds and funds from some foreign companies will flow into the US markets, which is a crucial aspect of the US investment market. At the same time, higher rates are likely to cause the appreciation of the US dollar. In addition, the Fed's interest rate hikes tend to raise the deposit rates offered by American banks. Many intelligent investors from the US and abroad will choose to deposit their money in American banks. The US stock market will fluctuate, causing stock prices to fall, but from a broad perspective, the Fed's rate hikes on the U.S. economy has more pros than cons.

How Fed rate hikes affect stock markets

  1. For the U.S. stock market, rising interest rates will increase the interest rate paid on bank deposits. Hence, investors will choose to deposit their money in banks, which will drastically reduce the number of funds flowing into the stock market;

  2. For China's stock market, the inflow of capital into the US stock markets will lower the investment in Chinese stocks, and their stock prices will likely fall, impacting the global stock markets.

  3. When the Federal Reserve raises interest rates, mainland funds or foreign capital will flow into the US markets. As a result, once the dollar appreciates, the RMB will likely depreciate, and the cost of purchasing raw materials for Chinese companies will increase.

How Fed rate hikes affect forex markets

If the Federal Reserve raises interest rates, it makes assets quoted in the US dollar very sought after, as the US dollar appreciates significantly. The value of each country’s currency will likely decline amid the increasing propensity of investors to purchase US dollar assets, which will also significantly impact a country’s capital flow. But most of the time, after the Fed announced a rate hike in the foreign exchange market, the dollar did not move higher.

The main reason for the above is that the foreign exchange market has certain expectations for the US dollar about raising interest rates. The markets keep track of various aspects, such as the economic situation in the United States and the speeches made by Fed members before the rate hikes. At this time, the foreign exchange market may have already concluded that the US dollar is about to experience higher interest rates. Hence, there would be a lot of information about the direction of the US dollar interest rate hike in the foreign exchange market. When the US Fed finally raises interest rates, the market may have already priced in the impact of this interest rate hike on the foreign exchange market. Therefore, when the Fed makes the actual announcement, it will not react significantly. On the other hand, if the Federal Reserve does not announce an interest rate hike, the market may have a relatively large reaction, given that it was expecting a rate hike.

What impact will the Fed rate hike have on the forex market?

  1. The Fed raises interest rates, which means that the US dollar enters a strong channel, and the currencies and commodities linked to the US dollar will depreciate;

  2. The higher interest rates create a strong impetus for international capital to flow into the United States;

  3. Countries supported by the US dollar-denominated capital will face the risk of capital pumping and capital flight;

  4. It shows that the Fed is optimistic about the economic development of the United States because it needs to adopt tighter monetary policies to suppress the economy’s overall momentum;

  5. Overall, the US dollar interest rate hike is good for the US dollar, making the US dollar index rise.

A Fed rate hike means an increase in the federal funds rate, which is the rate at which commercial banks lend money to each other. The higher interest rates have a substantial impact on the interest rates paid by commercial banks, affecting the interest rates offered by banks.

When the Fed raises interest rates, banks will also increase the interest on user deposits. Therefore, foreign exchange investors prefer to hold US dollars over other currencies. As international funds pour into the United States in search of higher yields, the US dollar will be stronger in the foreign exchange market and appreciate relative to other currencies. Therefore, other currencies will depreciate against the US dollar.

High-risk investment warning: Trading Foreign Exchange (Forex) and Contracts for Differences (CFDs) is highly speculative, carries a high level of risk and may not be suitable for all investors. You may sustain a loss of some or all of your invested capital, therefore, you should not speculate with capital that you cannot afford to lose. You should be aware of all the risks associated with trading on margin. Any opinions, news, research, analysis, prices or other information contained in this presentation is provided as general market commentary and does not constitute investment advice.

Education feed Join Telegram

Editors’ Picks

EUR/USD extends slide to fresh two-week lows near 1.0400

EUR/USD extends slide to fresh two-week lows near 1.0400

Following a short-lasting recovery attempt in the early European session, EUR/USD has met fresh bearish pressure and declined toward 1.0400. The dollar continues to gather strength amid risk aversion as investors await the PCE inflation data from the US.

EUR/USD News

GBP/USD stays below 1.2150 ahead of US data

GBP/USD stays below 1.2150 ahead of US data

GBP/USD is having a tough time gaining traction and trades below 1.2150 on Thursday as the dollar holds its ground in the risk-averse market environment. The US Bureau of Economic Analysis' PCE inflation data will be looked upon for fresh impetus.

GBP/USD News

USD/JPY defends bids above 136.50 as USD steadies amid mixed market

USD/JPY defends bids above 136.50 as USD steadies amid mixed market

USD/JPY is consolidating the recent gains above 136.50, as the US dollar bulls take a breather amid a mixed market mood and firmer Treasury yields. Investors turn cautious ahead of the all-important US PCE inflation. 

USD/JPY News

Editors’ Picks

EUR/USD extends slide to fresh two-week lows near 1.0400

EUR/USD extends slide to fresh two-week lows near 1.0400

Following a short-lasting recovery attempt in the early European session, EUR/USD has met fresh bearish pressure and declined toward 1.0400. The dollar continues to gather strength amid risk aversion as investors await the PCE inflation data from the US.

EUR/USD News

GBP/USD stays below 1.2150 ahead of US data

GBP/USD stays below 1.2150 ahead of US data

GBP/USD is having a tough time gaining traction and trades below 1.2150 on Thursday as the dollar holds its ground in the risk-averse market environment. The US Bureau of Economic Analysis' PCE inflation data will be looked upon for fresh impetus.

GBP/USD News

Gold stays on the back foot, retreats toward $1,810

Gold stays on the back foot, retreats toward $1,810

Gold has lost its traction and declined toward $1,810 following a consolidation phase in the early European session. Although the benchmark 10-year US Treasury bond yield is down more than 1%, the broad-based dollar strength weighs on XAU/USD. 

Gold News

Breaking: Bitcoin price drops below $19,000

Breaking: Bitcoin price drops below $19,000

Bitcoin price has breached a critical area of support over the past few hours, dipping below $19,000. Transaction history shows that a large number of addresses acquired BTC above $20,000. 

Read more

FXStreet Premium users exceed expectations

FXStreet Premium users exceed expectations

Tap into our 20 years Forex trading experience and get ahead of the markets. Maximize our actionable content, be part of our community, and chat with our experts. Join FXStreet Premium today!

BECOME PREMIUM

RECOMMENDED LESSONS

7 Ways to Avoid Forex Scams

The forex industry is recently seeing more and more scams. Here are 7 ways to avoid losing your money in such scams: Forex scams are becoming frequent. Michael Greenberg reports on luxurious expenses, including a submarine bought from the money taken from forex traders. Here’s another report of a forex fraud. So, how can we avoid falling in such forex scams?

What Are the 10 Fatal Mistakes Traders Make

Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process.

Strategy

Money Management

Psychology