How to Trade Rates Announcements

Trading rates announcements comes down to a few key considerations. Let’s first look at what it is all about.

Who sets the Rates Announcement?

Rates announcements come up on the economic calendar frequently, and it is a country’s central bank decision on the interest rate it will set. This includes the RBA (Australia), the ECB (Europe), the Fed (USA) and many more. Each body releases their updated rates announcement, but what does it affect?

What does a rates announcement affect?

A rates announcement affects the interest rate at which a country bases their interest terms on and is known as the cash rate. The interest rate affects mortgages, loans, term deposits and of course the cash rate, or the rate at which cash grows per annum. It in turn places pressure on other assets to perform better in order to factor in the risk of not holding cash, which in turn pushes more people to cash and can be detrimental to poor performing assets as money moves out of them and into a ‘safer’ option like a term deposit. The cash rate of course also has a big impact on the currency itself, and any pairs that the currency is a part of, for example an Australian interest rate (cash rate) change will shift the currency AUD and this will effect pairs like AUDUSD, EURAUD, AUDCAD etc.

How to trade rates?

Trading the rates decision can be done in a few ways. The announcement time is known and often there is a forecasted figure. The currency pair will have higher volatility around the time of the announcement, and at the second of the figure being released, the volatility will be larger again, with a bell curve type of volatility, slowing after the figure is priced in.

A key consideration to the figure being released, is what do the big players think of the figure and did they already expect it? The market can be priced into a potential future rates figure early, even weeks in advance. If they were wrong in their thoughts however, this could lead to even bigger volatility.

Understanding the expected figure (forecast) compared to what is current, or what is expected, will be helpful in determining a direction. Trading the rates announcement will often see big whips up and down, so being right doesn’t always mean trading well.

Price Action and Rates Announcement

Having a series of key levels set, understanding the value of the cash rate now and in the future and watching price action will all be critical elements when trading the rates announcement.

Be sure to factor in large volatility in both directions when considering risk, as the market doesn’t simply go ‘where it should’, but instead will whip up and down to catch out any egotistical trades.

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