Dollar gains as 50 bp Fed hike fears grow: what a basis point is

The dollar gained across the majors in the ECB reference rates of 11 November, as fears of a half-point Fed rate hike spread. EUR/USD's fixing fell 0.78% to 1.1127, from 1.1214 on 10 November. Investing.com reports that global bonds reeled as hot US inflation data and hawkish Fed comments revived fears of a 50-bp hike.

The move was broad. GBP/USD's fixing fell 0.86% to 1.3307, USD/CHF rose 1.12% to 0.8299 and USD/JPY rose 0.66% to 159.23. According to investingLive's European session wrap, the dollar climbed while the US bond market sat out the action, and Fed Governor Waller had put a 50 bps hike on the table. investingLive also notes that US bond markets are closed for Veterans Day. Our sister site has more on USD/JPY testing 159 as hike fears hit bonds.

What is a basis point?

A basis point (bp, often said "bip") is one hundredth of one percentage point. So 1 bp = 0.01 percentage points, and 100 bp = 1 percentage point.

Markets use basis points because interest rates and yields move in small steps. Saying "50 bp" is clearer than saying "half a percent". That phrase could mean a rise of 0.50 percentage points, or a rise of 0.5% of the current rate, which is a much smaller change. Basis points remove that confusion.

A percentage point is the simple difference between two percentages. A percent change compares the new number with the old one. They are not the same thing.

A worked example

1. A rate hike in basis points. A 50 bp Fed hike means the policy rate rises by 0.50 percentage points. 50 x 0.01 = 0.50. A 25 bp hike would be 0.25 percentage points.

2. Applying it to a yield. Our previous lesson covered a US 10-year auction that cleared at 5.02%. As pure arithmetic, a yield of 5.02% that moved up 50 bp would read 5.52%. That is an illustration of the maths, not a forecast.

3. Percentage points vs percent change. investingLive reports that German inflation slowed to 2.8% year on year in October, from 3.3%.

• In percentage points: 3.3 - 2.8 = 0.5 points, which is 50 bp.
• As a percent change: 0.5 / 3.3 = about 15%.

Both are correct, but they describe different things. A headline saying "inflation fell 15%" would mislead many readers.

4. Basis points vs pips in FX. Do not mix basis points with pips. A pip is the smallest standard price step in a currency pair (0.0001 for EUR/USD). EUR/USD fell from 1.1214 to 1.1127, a drop of 0.0087, or 87 pips. The percent change was 0.0087 / 1.1214 = about 0.78%, which some traders would also call 78 bp of price change. USD/CHF rose 0.0092, or 92 pips, which is about 1.12%.

Why it matters for new traders

Currencies react to changes in interest-rate expectations, and those expectations are quoted in basis points. Today, a shift in talk from a 25 bp step to a possible 50 bp step was enough to move the dollar against every major in the fixings. investingLive also reports that Goldman Sachs added another Fed rate hike to its forecast.

When you read a headline about central banks, check the units. "50 bp" is a specific, measurable change. Knowing how to convert it helps you judge whether a surprise is large or small, and stops you confusing a rate move with a price move.

Remember too that the ECB rates used here are fixings, set once per business day. Live prices move between fixings. You can follow EUR/USD on a live chart.

Key terms

• Basis point (bp): 0.01 percentage points. 100 bp = 1 percentage point.
• Percentage point: the plain difference between two percentages.
• Percent change: the difference divided by the starting value.
• Pip: the smallest standard price step in a currency pair.
• Rate hike: a central bank raising its policy interest rate.
• Reference rate (fixing): an official exchange rate published once per business day, not a live quote.