Interest Rates Drive EUR/USD to new lows

Over the course of the last 18 months EUR/USD rate has been rapidly declining due to the mix of reasons. It is certain that the whole situation with Grexit and other problematic EU member states has contributed a lot towards a slump in the price. Next to this, US economy is also growing beyond expectations. However, the main source of the continued decline in the price of EUR/USD today is found in the difference between the interest rates. Even though the interest rate for both EUR and USD is close to 0, the difference between those two is still vital.

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Will FED raise the rates?

Most of the experts do expect Federal Reserve to drive interest rates higher, many of them expected this to occur in September, yet the rates stayed unchanged – 0.25%. Just a few days ago ECB has stated that it is not looking into changing its current interest rate of 0.3%. Such a policy should result in a greater appreciation of USD over the course of the next few months.

March may be a turning as the interest rate set by FED could be changed. While many expecters also expect the rate to be set higher by the FED in March, the price may already receive some impact in February and could potentially grow to 1.10.

However, if the interest rate are not actually changed by the FED, or if the changed US interest rates are still lower than the ones set by ECB, we will see a continued downtrend of EUR/USD and this is something rather possible.

Watch 1.00 Level

Psychology is vital in Forex trading and it gets even more important when significant changes are occurred in the historical levels. For years people got that EUR is more expensive than USD and even though the price difference between 1.01 and 0.99 is fractional, the psychological aspect is just tremendous.

While many analysts predict the EUR/USD rate to be around 0.95 in September, I cannot see the break of the 1.00 level to go smooth. Perhaps if the level of 1.00 is broken, the price would not be around 0.95 in September 2016, but would rather come back to 0.95 by September 2016.

What to expect in Q1 2016?

When looking at EUR/USD daily chart it is possible to see that we just saw the lowest price this year a few days ago and, unfortunately for Europeans, there is nothing going on at the moment that could set the price higher.

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This is why it is vital to keep an eye on the price movements before March, as the rate is expected to go down in Q1 2016, yet if FED is expected to keep the rates as they are, EUR/USD price would continue to go down even faster. Alternatively, if the FED puts the rates up, we could see some stabilisation between 1.02 – 1.08 rates.

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