Fed’s dove comes home to roost

The Federal Reserve is concerned about global growth and the rising US dollar. Andrew Harrer / Bloomberg News

Last week the US Federal Reserve surprised the markets with its notably dovish meeting minutes. The markets looked for just one thing which they found in the words “keeping interest rates lower for a considerable time”.

We were wondering whether the Fed would exclude it from its statement, but it clearly reiterated it, indicating its dovish position.

The statement clearly shows that the Federal Reserve is concerned about global growth and the rising US dollar. This made the markets doubt the Fed’s previous promise of raising rates, which led to a massive selloff in the US dollar across the board. However, bad news for the dollar is always good news for stocks. US equities advanced notably, which was good for equity investors.

The market response was very similar to what happened in September of last year, when the Fed shocked the markets by saying that it had overestimated the economic recovery and was going to delay the tapering process.

The impact was high because the markets had been pricing in the tapering decision since June. The meeting last Wednesday had the same effect.

The Fed had been saying that rates would rise as early as next year, which led the US dollar advancing significantly for 12 consecutive weeks against all the major currencies.

The change in their approach led to unprecedented trading patterns which had not been seen for many months.

One of the areas we have been tracking since the beginning of the tapering process is the US housing market.

From the start of the tapering process the prices have recorded their largest fall in four years. This is not good news and is probably one of the main reasons that the Fed cannot raise interest rates.

For traders the good news is that forex volatility is back on track. The actions of the Fed, theEuropean Central Bank and other major central banks has helped this.

The IMF’s decision to cut global growth forecasts also created opportunities for traders in all markets.

This is primarily because it presented a good opportunity to move out of stocks ahead of a long awaited correction.

The forex market is one of the options for traders to create diversity until the stock markets corrects its pricing.

Nour Al Hammoury is the chief market strategist at ADS Securities

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