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Monetary Policy’s Impact on Markets and FX Trading is Changing

Monetary Policy’s Impact on Markets and FX Trading is Changing

John Kicklighter, Chief Strategist

Talking Points:

  • The focus on monetary policy is moving away from competitive dovish and hawkish bearings and towards stability
  • Scales now focus on return of economic response to risks of fanning financial crisis
  • Top event risk to fuel this global theme in the week ahead includes: Fed, BoJ, SNB, BoE, China lending, Draghi tal

See how retail traders are positioning in the majors using the SSI readings on DailyFX's sentiment page. Having trouble trading in the FX markets? This may be why.

It used to be that the threats of a rate cut or increase in QE could push a currency low while the early musings of a hike could lift it. The still-crucial fundamental theme is not so simply oriented anymore. While the individual bearings of the world's largest central banks still carry influence over their respective currencies, monetary policy is increasingly an aggregate and global concern. And, in this influence, it is a prominent threat to financial stability and dubious risk appetite bearings.

The 'reach for yield' was a laughed-off concern just a few years ago, but today it is ubiquitous among both bulls and bears. An appreciation of the exceptional risks we face against a troubling indifference in actual positioning speaks to the exceptional risk that the financial markets face. In turn, the influence that monetary policy imparts on this bubble becomes increasingly significant. The effort to push a currency lower for trade advantage or promotion of wealth effect has an exceptionally small margin of return. Yet, it promotes an increasingly large expansion of financial stability - and not just locally, but globally. Monetary policy is increasingly positioning itself at the edge of a bubble.

Moving forward, we should look beyond the simple assumptions of a currency rising or falling for its central bank's policy moves. Currencies like the Euro and Yen have already shown the limited impact this can generate with QE and negative rates invoking inverted and diminished influence on the market. Instead, we will look at key event risk like the FOMC decision; BoJ, SNB and BoE policy meetings; and the unscheduled by policy sensitive event risk as a spark for financial stability - for better or worse. We discuss this key theme and its changing influence in this weekend Strategy Video.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.