It's a race to the bottom for the world's central banks, with the European Central Bank cutting its main interest rate, following more monetary easing from the Bank of England and a rate cut from the People's Bank of China.
The most interesting bit from a spread better's point of view is the effect this has on a currency. Grasping that is one of the absolute basics of playing the currency markets.
Interest rates affect currencies perhaps more directly than any other factor. And the short-term impact is usually entirely predictable. If a bank such as the ECB lowers the main euro interest rate, the currency falls against other currencies or in forex parlance, it "weakens".
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Sure enough after this morning's interest rate cut to 0.75%, the euro fell around 0.5% against the US dollar. It also dropped against other currencies such as the Australian and New Zealand dollars. So anyone who was short say EUR/USD in anticipation would have made money.
Equally, moves to create more liquidity such as quantitative easing (QE) will tend to weaken a currency as, very broadly speaking, QE creates more of the currency in question which, as in any market, will tend to lower the price of it against other currencies.
The flipside of this is that other currencies strengthen. This can simply be by default currency markets are zero sum in the sense that one currency has to weaken or strengthen against another. But it can also be because a central bank has chosen to raise rates, albeit this isn't an obvious prospect for any of the major currencies at the moment.
Watch out for the indirect moves that can occur sometimes. For example the Aussie dollar got an extra fillip from the move by China as the forex markets decided that anything that might help the Chinese economy would also help the Aussies who sell a lot of commodities such as metals there.
What is slightly more difficult to call is what will happen to the euro next. There are two views (as there usually are in financial markets!). Some analysts see this move actually causing the euro to strengthen against other currencies such as the pound, as markets perceive that at last the Europeans are doing something to restore faith in Europe's battered economy. After weeks of largely fruitless summits, anything concrete may restore confidence is the logic.
However I don't buy that argument. Yes the ECB has "done something" but then again it needed to, and fast given the paralysis that seems to be infecting the politicians as well as the European economy.
-
8 of the best houses for sale with outdoor swimming poolsThe best houses for sale with outdoor swimming pools – from a family house in Wimbledon Village, London, to a 1640s mansion in Derbyshire with a heated swimming pool in the grounds
-
Trouble brews in B&M as bargain shops take a hitOpinion Once a stock market darling, B&M's share price has slumped. What has gone wrong for bargain shops?
-
The pound could hit parity with the euro – but if it does, buy itFeatures Anyone visiting the continent this summer will have been in for a rude shock at the cash till, says Dominic Frisby. But the pound won't stay down forever.
-
Gold’s rally should continueFeatures Matthew Partridge looks at where the gold price is heading next, and what that means for your online trading.
-
Prudent trades in PrudentialFeatures John C Burford shows how his trading methods can be used for more than just indices and currencies. They work for large-cap shares too.
-
Did you find the path of least resistance in EUR/USD?Features John C Burford outlines a trade in the euro vs the dollar in the wake of the US Federal Reserve’s most recent announcement.
-
How to find the path of least resistance for EUR/USDFeatures A belief that "news makes the markets" would have lost you a lot of money betting against the euro, says John C Burford. Here's what to watch instead.
-
Lightning has struck twice in the euroFeatures Mario Draghi's latest stimulus package took the euro market by surprise, says John C Burford. But not chart-following swing traders.
-
The euro finds support as sentiment plummetsFeatures No need to wait for the European Central Bank announcement on Thursday, says John C Burford. Elliott wave theory tells you all you need to know.
-
Stockmarkets rally, just as I forecastFeatures The sharp rally in stocks caught the pundits by surprise, says John C Burford. But chart-following traders saw it coming.
