Dovish Federal Reserve

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Federal ReserveYesterday’s monthly guidance from the U.S. Federal Reserve has become the major event in the Forex calendar over recent years. It used to be that the Non-Farm Payrolls release, showing how many new jobs had been created over the previous month, was the major driver of the USD which in turn is usually the major driver of the Forex market. However, since the advent of “quantitative easing”, the FOMC tends to produce much stronger market reactions and that does not look as if it is going to change soon.

This release produced a broad fall in the value of the U.S. Dollar and a rise in the U.S. stock market. The two main takeaways were as follows: a signal that the Federal Reserve would be “patient” in rising interest rates any further, and a statement that there would be flexibility in “unwinding” the balance sheet. These are obvious pointers towards a weaker greenback and markets moved accordingly. It was not exactly a huge surprise, but it was enough to push markets further in the direction of a new trend which has been emerging recently against the U.S. Dollar.

So, which currencies benefited the most from the weak Dollar, where were the largest rises? The Australian and New Zealand Dollars stood out, up by more than 1% within an hour or so of the statement. Both have continued to rise quite strongly and have made higher highs today. Precious metals such as Gold and Silver have also advanced strongly to new highs. This would suggest that these are the currencies which trend or momentum traders should be looking at right n ow.

It is not unusual for a sudden weakening in the U.S. Dollar to boost the U.S. stock market, as stocks are valued in Dollars and a cheaper Dollar also can attract foreign investment. However, the picture is more complex in stocks as although the S&P 500 Index has been rising since just after Christmas, it is still in a bear market by every technical measure of the term. This suggests that it may be too early for any long-term stock purchases except on value grounds.

Adam is a Forex trader who has worked within financial markets for over 12 years, including 6 years with Merrill Lynch. He is certified in Fund Management and Investment Management by the U.K. Chartered Institute for Securities & Investment.