How Do Markets React to Changes in Interest Rates and Foreign Exchange

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One of the most anticipated things in the market is the Federal Reserve's announcement on interest rates. A cut or hike greater or smaller than expected can trigger a huge move in a stock, future, sector, and whole market. But not all sectors and stocks react the same way, as some sectors react favorable to higher interest rates while other do not. You should know what a change in rates will do to the stuff you trade. And of course you should know when these announcements are due. Changes in foreign exchange can have more subtle effects on some markets, but nevertheless you should know if the stocks or commodities you trade are sensitive to them. As the U.S. dollar drops, gold will most likely go up. Cocoa is a market that can be affected by the British pound because London cocoa futures trading, which have a huge impact on worldwide prices, is conducted in British pounds. So, big fluctuations in the pound will impact the price of U.S. cocoa futures, due to the cross-currency fluctuations of the British pound vs. the U.S. dollar. There is constant arbitrage taking place between the New York and London cocoa markets so the rate between the pound and the dollar is very important. This is something the average person may not be aware of but it's good to know.

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