In 2022, geopolitical tensions and inflation contributed to the rise in interest rates. In 2023-2025, economies developed anti-inflationary expectations, prompting central banks to lower interest rates, although not yet to the pre-2022 level. Financial traders prepare themselves for the ongoing fall in interest rates. When the interest rate decreases, the national currency becomes more available, the exchange rate weakens, and the demand for and prices of stocks, bonds, and other financial assets rise.
When the trend is certain, fintech, in the form of algorithmic trading, could be an effective tool. Nowadays, fintech covers nearly 70% of the global equity market and 80% of the forex market.
It has both advantages and disadvantages in the global markets.
- Pros: It’s fast, accurate, low-cost, and operates 24/5 in international markets, without stress or emotions.
- Cons: It’s unpredictable during uncertainty, and it can have technical bugs.
People are less emotionally engaged in fintech, while some seek excitement in trading.
How can we prepare our fintech code for a fall in interest rates? We used data from the 2022 interest rate rise and applied reverse logic.
We analyzed 64 cases of interest rate hikes in 19 markets across nine event windows in 2022, examining currency volatility second-by-second. We used the news publication time about the interest rate hike on the central bank's website as the official announcement.
Two outcomes could be valuable here:
- In 61% of cases, the interest rate increase caused the national currency to strengthen within the second following the news publication. Therefore, when interest rate rises, the more likely exchange rate trend is upward.
- The markets start pushing the exchange rate up an hour before the news is published, then rise again within 15 minutes before publication, reaching its peak at the second of news release. Afterward, it drops within 5 minutes after the publication but remains above the pre-publication level (Picture 2).
Based on our results and mirrored logic, we conclude that a fintech algorithm can be trained to predict that, in the moment of the news announcement about an interest rate fall, the national currency will weaken, sustaining this effect for at least the next 5 minutes.
Please be aware that it’s not financial advice! It aims to illustrate the logic behind fintech behavior in global markets. My personal experience with fintech trading on USD/CHF resulted in losses when the AI failed to predict the precise second of the interest rate change announcement in November 2022. That motivated me to learn from my mistakes and conduct the research personally to share the findings.
