How to Prepare Traders for the Fed and ECB Rate Decisions This July
July 20, 2023
By Acuity Trading
An important aspect of trader education is empowering them to trade calendar events, such as major monetary policy changes, economic updates and central bank meeting minutes. One of the most important of these is interest rate decisions by the major central banks. Brokerages have an opportunity to help prepare their clients to make the most of market moves created by interest rate changes. Another important period is the quarterly earnings season. The stock market tends to see volatility following major earnings releases, bringing multiple trading opportunities. While the US Federal Reserve (Fed) and the European Central Bank (ECB) are making key interest rate decisions in July, the Q2 earning season also kicks off this month for the corporate world.
Significance of Interest Rate Decisions
As central banks’ interest rate decisions impact the liquidity in the financial markets, they affect all asset classes. The Fed and ECB are two of the most impactful authorities, whose decisions affect the markets globally. Since the US dollar is the global reserve currency, anything that affects the dollar moves the markets worldwide. The euro is the second most traded currency and the ECB’s interest rate changes impact the currency and hence the economy in the 27-nation bloc. Moreover, with uncertainties persisting across the financial markets amid geopolitical issues in Europe and the recent banking crisis, the world has eyes on these two central banks.
Brokerages serve the needs of customers at all levels of experience. They need to educate them about the importance of central bank decisions, what drives interest rate decisions and how they impact the market.
Speculating on Interest Rate Decisions
Since interest rate decisions give direction to the financial markets, traders worldwide speculate on how an upcoming decision might impact the prices of instruments they are following. To have a better understanding on how these decisions are made, brokers can provide intel to their clients on a variety of preceding data points that often affect rates.
Speculating on whether interest rates will be raised, reduced or left unaltered requires background knowledge of:
Economic Activity in a Region
A strong economy with a thriving GDP does not need to make major interest rate changes. However, soaring inflation, like that witnessed in 2022, might force central banks to hike interest rates. Traders need to be informed of such drivers of change.
The banking crisis in the US in the first quarter of 2023 was triggered by a lack of liquidity in the reserves across the banking sector. This raised concerns about an impending banking collapse, and the Fed had to halt its rate hiking spree to reassure investors that the banking sector was not in any immediate danger.
Apparent growth of industry could boost demand for institutional credit, while a slowing economy could lead to a decline in loan requirement. Central banks may alter interest rates to stimulate or suppress such demand.
An economy with a fiscal deficit or high government debt tends to see interest rate hikes. This impacts the general perception of economic growth and investor sentiment towards government bonds and treasuries.
A nation that seeks foreign investment offers higher interest rates to add value to cross-border money. Rapidly developing nations and those with the availability of abundant resources are the ones that benefit from such rate hikes. It stimulates activity in the economy, helping the GDP grow.
Several other economic events influence the financial markets and interest rate decisions. For instance, fiscal deficits result in higher bond yields. Traders need information and analysis of all such data to speculate on interest rate decisions. They can trade before, during or after the announcement by the central bank, based on sufficient background analysis. With advanced analytics and market sentiment analysis, traders can make better decisions on trading any calendar event, especially ones as big as interest rate decisions.
Leverage Cutting Edge Technology to Keep Traders Engaged
Adequate use of advanced analytics to gauge investor sentiment and the impact of any economic event or earnings release is essential for informed decision-making. Collating the data from causal events to perform fundamental and technical analysis helps discover trading opportunities. An AI-powered analytics tool can combine news, calendar, price and sentiment data to generate comprehensive insights into the financial markets.
Simultaneously, providing timely information to traders with actionable insights, right in their inboxes, is equally important. The ability to discover and capitalise on opportunities with analytics to make decisions boosts trader confidence and activity. Streamlining research is a key differentiator in extending the lifetime of traders on a broker’s platform. It facilitates re-deposits and trade volumes, helping brokerages enhance their ROI.
The Q2 earnings season kicked off on July 14. Analysts believe this might be the third quarter in a row when companies report declining earnings. Informing traders on these expectations can help prepare them to capitalise on any ensuing market moves after each earnings release. With Acuity’s corporate calendar, brokers can rest assured that their traders will never miss out on any major earnings release. Supplementing it with market analysis to support speculation on how the stock is likely to react can prove invaluable for traders during the current and upcoming earnings season.
Acuity’s Asset IQ is an effective tool that helps traders gauge the impact of any macro or microeconomic event on the asset class of their choice. It can be easily integrated into any CRM, automation or email marketing tool to send information directly in the trader’s inbox. It is a highly customisable tool with plug-and-play features to facilitate seamless integration with any trading platform.
Additionally, it gives each an opportunity score to help traders gauge the impact of open position on their portfolios, further strengthening their decision-making capabilities. Contact usfor tools to help your traders make the most of potential market volatility induced by the upcoming interest rate decisions.