Chris Vermeulen, experienced analyst, discusses the effect of negative interest rates for EU countries.
Are You Ready for Negative Interest Rate and Pay the Bank to Hold Your Money?
The six members of the European Central Bank (ECB) Executive Board and the 16 governors of the euro area central banks vote on where to set the rate. We watch interest rate changes closely as short term interest rates are the primary factor in currency valuation.
A higher than expected rate is positive for the EUR, while a lower than expected rate is negative for the EUR. Today (Thursday June 5th) we expected a rate cut. The cut was not as much as analysts expected which is bullish for the short term, but the rate is still declining and nearing zero, or even worse, negative territory.
A negative interest rate may sound crazy or impossible, but it’s already happening in Denmark.
Europe is already in a deflationary state and central banks are doing everything they can to bring about inflation by cutting rates and devaluing the euro.
This will cause a ripple through multiple asset classes and will drastically alter the outcome of individuals worldwide.
Just imagine if you had to pay a bank to hold your money and you do not earn any interest but rather pay interest.
People who have been saving their entire lives will get hit the hardest. Retired folks will stop earning money and start paying for all the money they hold held at banks.
Individuals will go more into debt because money will be extremely cheap to borrow.
Price of assets like equities, real-estate, discretionary goods will rise because the cheap money everyone is borrowing will be used to buy more stuff. While all this happens everyone takes on more dept. It is a brutal spiral leading to increase debt levels, inflation and eventually bankruptcy.
If the euro dollar starts to decline at a quicker pace the US dollar will likely rally. A strong dollar could affect the commodities market including gold, silver and the European stock markets.
Todays rate cut led to a pop in the euro, but that is likely to be short lived. I hope this sheds some light on the markets and helps in your trading.
P.S. In the next few days members and myself will be looking to enter some trades based round this analysis. See Premium Trading Video & Newsletter
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Editor’s note. Will the European rate cut lead to a rally in US dollar and commodities? We will know very soon. Meanwhile, get set with the recommended trades.