Hello King Koala and folks.
Good day to you!
The market started this week with relatively high hopes and optimism. The euro and gold movements were ascending. This week had meetings of the US and British central banks and US housing statistics and CPI.
Situation in Europe was not good.
Christian Lagardh commented that the problems were Greece’s and hence why should the people of Germany and France pay? Trichet once said that Greece would solve their own problems and needed no assistance. However he later said that if needed, assistance will be given. However, at the Minister of Finance meeting in Brussels, Greece said that there wasn’t a need for foreign aid yet. After the Brussels meeting, concerns regarding Greece reduced and risk taking increased and equities rose in value.
The US Federal Reserve unexpectedly raised the discount loans rate by 0.25%. Although FED’s Bernanke did the hike as an action to unwind from the emergency measures taken during the crisis, the markets were not expecting an action so soon and risk aversion emerged. The US Dollar rose and government bonds and bank stocks dropped.
To ease the markets, Bernanke said that despite this increase, the cost to borrow money in the economy cycle (Federal Reserve interest rate) remains low as the situation remains fragile due to the slow recovery in the employment market. The Federal Reserve also announced that it does not expect this move to lead to tighten conditions for households and businesses to obtain credit and loans. The reason for this increase in the discount rate is to urge banks to reduce their reliance on direct assistance from the Central Bank and instead move towards the normal process of sourcing funds from the money market. This step is also considered as a first step in the normalization and reduction of the Monetary Bank of America’s balance sheet.
Do note that this discount rate is different from the usual interest rate. This is the interest rate that the Federal Reserve applies to loans granted directly to banks. It previously remained unchanged for more than 3 years. As this may result in a tighter loans market, investors do not see this with favor. This may also indicate preparations for an eventual interest rate hike.
The effects of an interest rate increase spans over a long period of time. Although the Federal Reserve commented that this increase does not mean that an upcoming interest rate hike is coming and interest rates will remain low, investors may have an opinion of their own. With this action, the market is probably inclined to speculate that the expansionist policies of the Federal Reserve has reached it’s end. Although possible, there is still no increase in interest rates announced. A corrective movement is happening but is unlikely that the process will challenge the US Dollar.
Therefore I think when the respective positive signs from the UK and Europe central banks appears in due time, we may experience a similar situation with the exception that the US Dollar will be challenged.
It is my opinion that a possible trading strategy will be to sell the EUR/USD from tops and that we must be wary of the any temporary bullish EUR/USD movements. Once again these are my opinions and hence do use your own discretion.
Have a great weekend.
Masoud is a businessman and a Senior Koala at the Forex Factory Koala Thread.