Monday, 4 January 2016 did not quite live up to the hype as the first official trading day of the New Year. Chinese equities plunged 7% and by midday trading, the S&P 500 index dropped 46 points (-2.3%), the Dow Jones Industrial Average dropped 416 points (-2.4%), and the NASDAQ dropped 132 points (-2.6%). Expectations of a bullish start to the New Year were erased when Chinese equities markets opened the trading day with a major selloff that triggered the circuit breakers. In fact, so dramatic were the declines in China that Monday the 4th January marked the worst single day selloff since the end of August 2015. The selloff coincides with the six-month moratorium on equity sales that the Chinese authorities slapped on shareholders with more than 5% holdings in Chinese companies when the $5 trillion Chinese economic rout took place. Naturally, the woeful trading activity on global markets has impacted currency markets too, notably the EUR/USD currency pair.
Factors Affecting the EUR/USD Currency Pair
The factors that affect this particular currency pair include any and all of the factors that affect the euro and the dollar individually and jointly. What is most important in determining the relative exchange rate between these two currency pairs are the interest rate differentials between the Federal Reserve Bank and the European Central Bank. We know that the divergent policies adopted by these two monetary authorities have created plenty of opportunities for binary options traders. The Fed has enacted a policy of quantitative tightening, raising interest rates by 25-basis points to 0.50%. Further increases in interest rates are expected in April, perhaps in June and later on in 2016. By the end of the year, analysts are forecasting interest rates in the region of 1% +. By contrast, the European Central Bank has been moving in the opposite direction, decreasing the deposit rate by 10-basis points to -0.30%, and increasing quantitative easing (asset repurchases program) by an additional 6 months by €60 billion per month. This has resulted in increased economic activity in the Eurozone, and led to a strengthening of the European currency against the USD.
