The FOMC meeting minutes released yesterday renew focus on talk of QE tapering, produce risk-off price movement. Will traders be able to profit if the Fed slip up and gets it wrong?
Yesterday’s release of the most recent FOMC meeting minutes revealed further evidence that the Federal Reserve is broadly aware that the unprecedented QE program, which has been running for several years now, is going to have to be wound down in the foreseeable future. The key quote from the minutes was:
”Participants generally judged that, as a matter of prudent planning, it was important to be well positioned to reduce the pace of asset purchases, if appropriate…”
This is hardly fresh news,but even this mild language seems to have produced some notable risk-off flow.
FOMC Minutes Market Impact
There were meaningful market movements following the release of the minutes. Approximately sixteen hours following the release, the following price changes have occurred:
- S&P 500 Index -1.34%
- NASDAQ 100 Index -1.40%
- Gold +0.43%
- Crude Oil -0.68%
- USD/JPY +0.66%
- EUR/USD +0.32%
- USD Index +0.01%
Interestingly, despite the FOMC’s message logically suggesting a strengthening of the U.S. dollar, it has remained basically unchanged. We see the impact in favour of the Japanese yen and against the U.S. stock market,although it should be noted that global stock markets have also been weaker lately, with the U.S. market bucking that trend over recent days.
This suggests that while the Forex market is dominated by price movements in the U.S. dollar, and although there is a long-term bullish trend in the U.S. dollar, the current area of focus on the Federal Reserve will produce most impact in stock markets rather than the Forex market.
What Does This Mean for Traders?
Traders should be aware that the fundamental issue which is likely to dominate markets for the foreseeable future regarding central bank policy will be the U.S. Federal Reserve’s coming attempt to slowly tighten monetary policy, moving away from its ultra-accommodative QE expansion stance. The Fed will be careful to do this very carefully and gradually, because there is plenty of evidence that without massive QE the bull market in stocks will come crashing to a halt, and the Fed will want to avoid that.
The major related question for traders is, if the Federal Reserve makes a mistake and is eventually forced into a hasty tightening move, will that be exploitable by buying the Japanese yen and shorting U.S. stocks which have benefited the most from the recent reflation? The answer seems likely to be yes.
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Rehana William |Financial Consultant _Forex_Gold Xauusd| Fund Manager 