Here we are, almost in the middle of the month and the market’s doing nothing except ranging. The reasons why can be found from the fundamental side rather than from the technical one.
Three of the most important central banks in the world, the Federal Reserve of the United States (FED), the Bank of England (BOE), and the European Central Bank (ECB), are walking on different paths. This can only increase the uncertainty that is reigning over the world of foreign exchange.
The FED has stated its intentions to hike the interest rate as early as June, yet here we are, in the middle of May and the FED hasn’t done anything, and recent data suggests it may not hike interest rates anytime soon.
The reason why the FED is hesitating comes from its inability to fulfill its dual mandate:
- to keep inflation below, but close to two percent, and
- to create jobs.
While the creation of jobs seems to be as expected, in the sense that the unemployment rate is reaching levels that one could have only dreamt of a couple of years ago, two problems still remain:
- the unemployment rate is based on a lower participation rate, so the proportion is not that adequate, and
- inflation is lacking (to use a kind word), if not missing at all.
The Fed is in a phase that shows a clear case of uncertainty while the other central banks are not in positive places either.
Let’s look at the ECB for a change. The European Central Bank is involved in a QE (Quantitative Easing) program that is supposed to be ongoing until September of 2016 at the very least, and only if inflation is going to pick up. If not, the program should still be active.
For those of you who are not aware of what QE means, it is the central bank that is buying its own state/region bonds in order to inflate assets, namely to create inflation. No inflation means no spending, no spending means no jobs, and so on, a vicious circle that could only spell trouble.
Even if the European economic outlook is going to improve in the period to come, it is still highly unlikely that the ECB will end the QE program if inflation is not picking up.
Last but not least, we have the BOE, and this time we’re talking about the fifth biggest economy in the world. The UK just ended elections that showed the winners, the Conservatives, enjoying a surprising majority. The problem here is that they promise an EU (European Union) membership referendum, and this should spell trouble for both the GBP and the EUR.
All in all, we’re in very uncertain times, and central banks around the world are preserving both capital and the time to act when most needed. Add Greece’s potential default to this equation and you have a pretty mixed picture ahead of the all-important Fed June meeting, and possibly a turbulent summer ahead.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
