The main driver of the forex market at the moment, seems to be the US Federal Reserve and what moves they will perform moving forward with regards to interest rates and their economy saving bond buying program.
As we recall, the US Central Bank has slashed interest rates to record lows and introduced an unprecedented bond buying program to counter the effects of the coronavirus, which has not only decimated the US economy, but the entire world economy.
If we look at the forex markets over the past week, and in particular the greenback, we can see that it has strengthened significantly against all of the major currencies and if you ask any analyst they will tell you that the main driver behind this move higher is the Fed.
If we look at the US economy, we can see it is on the rebound from the pandemic and in fact I would go as far to say, that it is clearly the leader of the pack in terms of economic recovery compared with other world leaders.
That brings us back to the US Federal Reserve and where do they fit into all of this? The answer is US monetary policy and what they are prepared to do with interest rates, and rumors over the last week have shown that the market expects a rate hike much earlier than expected.
The Bond buying program is rumored to be ending earlier than expected as well, which leads analysts to believe that the US economy has recovered enough and can now stand on its own without government help.
In contrast, other developed economies around the world such as Europe, Japan and Australia to name a few, are still down in the dumps with regards to the coronavirus, and at this time, have no plans to reduce their stimulus programs which are propping up their economies.
It means if everything goes to plan, the US will be the first country to lift interest rates as the economy gathers pace, which will definitely attract investors looking for some type of yield, and probably explains the current interest in the greenback as traders are ready to jump in before the rate hike is priced into the market.
Even if the Fed doesn’t raise rates or reduce their bond buying program as fast as the market currently predicts, the possibility it may happen should keep the US dollar well bid, and it is statements like this from the Fed in its latest minutes meeting that will keep the market wondering just when they will pull the trigger.
"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, in response to unexpected economic developments, including faster-than anticipated progress toward the Committee’s goals or the emergence of risks that could impede the attainment of the Committee’s goals,"
For now, it looks like we may see some bouts of short term weakness in the US dollar but as the coronavirus subsides and the US economy goes from strength to strength, it looks like the greenback will be a winning bet.
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