Market participants should prepare for what is probably going to be the most important trading week for the rest of 2014, if not the most important of the whole year.
This is due largely to the FOMC (Federal Open Market Committee) statement and interest rate decision to be announced Wednesday after the London trading session ends and early into the North American session. While no one expects the Fed to actually raise interest rates, the meeting is important as the FOMC is about to announce the end of the quantitative easing program that has run in the United States for so many years.
Normally this should not impact markets much, as there are only $15billion asset purchases being made on a monthly basis, and the Fed is going to taper this from Wednesday. The problem is what the end of tapering means and what this signals to the financial market.
Federal Reserve has long been viewed as the most proactive and prominent central bank in the world. They action what needs to be done, and the other central banks tend to follow. This is only normal considering the world’s reserve currency status the US dollar has. However, we believe that the actions of the other central banks will be different this time.
In the United Kingdom, many would expect the BOE (Bank of England) to unwind the Asset Purchase Facility program after the Fed ends the quantitative easing. It isn’t that easy. We saw how fragile the economy is lately, and inflation is going to the downside and not the central bank’s target. We have not even mentioned the Eurozone or Japanese economies, where there is simply no room for growth, and especially not at the speed the US economy is growing.
As a consequence, expect the US dollar to show its muscles against pretty much any other currency, especially against the CAD and EUR.
Look for any kind of positioning clues the market may give until Wednesday, as that would be the direction to trade currencies for the rest of 2014, and beyond.
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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.
