Forex Market Price Movement vs FED Rate Hike Policy

Forex Market Price Movement vs FED Rate Hike Policy


From the very beginning of the year 2018, trading the financial instrument has become extremely hard. Those who are familiarized with the term Forex trading profession can clearly assume the content of this article. Starting from the institutional traders ending with the retail ones, everyone used to do the fundamental analysis to study the performance of certain country’s economy. Macro and microeconomic information’s helped the traders to decide the future movement of the currency pair to a certain extent. But what if the fundamental data starts to mislead the traders? The ultimate result is nothing but endless confusion and chaos among the investor’s community.

FED rate hike and its impact

The U.S dollar index which measures the overall value of the green buck’s strength against six major rivals is highly sensitive to FED rate hike decision. Back in 2017, former Fed chairperson Janet Yellen hiked their interest rate several times followed by a dovish statement. Usually, the leading officials of a certain country come up with a hawkish statement when they raise their interest rate. The rise of interest rate is nothing but the reflection of the strong performance of a certain country economy. But when U.S FED officials hiked their rate and immediately started out their economy is not doing well in the press conference creates a massive clash in the interest of the investors. They don’t have any clear clue whether the country’s economy is stable or the rate hike is nothing but the outcome of the inflation problem.

Topdown charts, Datastream, Federal reserve


Digging into the advanced economic factors

Factors like inflation, average hourly income, and jobless claim are often misunderstood by the traders. An imminent rate hike doesn’t necessarily mean the country has secured stability in most of its economic sectors. It might be the end result of outbound cash flow which creates an external pressure among the leading bank officials to hike their rate. So why such rate hike when country’s economy is facing massive inflation? This is done due to only to maintain stability in the trade balance sheet. When a currency is devalued it becomes easy for the foreign investors to burrow big sum of money from the central bank. With unchanged interest rate, they could have access to more fund of the government which will eventually prolong the recession period. To mitigate this effect, rate hike often necessary even during poor economic performance.

Press conference and speech from leading officials

So how do we define the impact of FED chairperson or Mario Draghi’s speech? At times the investors often see the market reaction is completely opposite to stated statement. The potential market volatility is created by two forms of market variables. First of all, those who have invested a huge amount of money buy or sell a certain portion of their economy to balance out the potential risk factors.

The second factors are nothing but clean wipeout of the retail traders. Let’s make it clearer. Let’s say ECB wants to buy EURO when FED officials lower their interest rate. But in order to buy a huge amount of EURO in the market, we need a big number of sellers. And most importantly the huge buy orders from ECB will be triggered at the certain price level. At times leading official’s speech or press conference acts as the price driving catalyst to trigger this huge volume of orders set by the central bank.

So how do we save ourselves from such disasters? To be honest, chances are very low to protect our running trades during such events. For this very reason, it’s better to stay in the sideline until the big orders are being filled. However, if you still want to trade during such market conditions, don’t go for the obvious fact. The things which you are seeing is being followed by millions of retail traders. So you need to think out of the box to protect yourself from such events.

Economic projects from FED

This is one of the most vital things you need to understand as a trader. Economic projections are nothing but a leading catalyst for the traders. So if you want to trade the Economic projection statement during the FOMC press conference, you are most likely to lose a huge sum of money.

Let’s say, Jerome Powel, the current FED Chairperson statement they will hike their interest rate for three times in next year. This doesn’t mean the recent performance of the U.S economy is extremely stable and the U.S dollar index will rally higher for the remaining part of the year 2018. The rate hike might be the end result of inflation rate problem or stable economic growth. You need to listen to every single word or else you will always get yourself burnt by wild spikes of the market. This is the very reason for which we see massive spikes in the forex market in the most press conference. The retail traders act aggressively without listening to the whole statement.

Actions of the smart investors

If you truly believe trading is the right profession for you, stay in sideline in such events. Wait till the market dust settles. If you roll your dice with the retail traders, you are just gambling in Forex market. Institution traders and retail banks always make sure that they are playing safe in the investment industry. Every action has its consequence so take your step very carefully. (Trade wisely)

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