In the fast – paced world of forex trading, investors are currently adopting a wait – and – see approach. They are bracing themselves for the Federal Reserve’s (Fed) upcoming monetary policy announcements following the March meeting. This event is highly anticipated as the US central bank is also set to release the revised Summary of Economic Projections (SEP), commonly known as the dot plot.
US Dollar’s Performance This Week
The performance of the US Dollar (USD) against major currencies this week has been a mixed bag. A detailed look at the percentage change table reveals that the USD has shown varying degrees of strength and weakness. Against the New Zealand Dollar (NZD), it has been particularly weak, with a depreciation of 1.17%. In contrast, it has gained 0.69% against the Japanese Yen (JPY).
The heat map, which shows percentage changes of major currencies against each other, provides a more comprehensive view. For instance, when comparing the USD as the base currency and the JPY as the quote currency, the change indicates the movement of the USD/JPY pair. Traders often analyze these figures to identify trading opportunities and trends in the forex market.
Despite a risk – averse market atmosphere on Tuesday, the USD failed to gain an edge. The USD Index closed in negative territory for the third consecutive day. As of early Wednesday, the index was moving sideways, slightly below the 103.50 mark. Meanwhile, US stock index futures showed a marginal increase, despite the significant losses on Wall Street’s main indexes on Tuesday.
Bank of Japan’s Stance and Its Impact
During the Asian trading hours on Wednesday, the Bank of Japan (BoJ) concluded its two – day monetary policy review meeting. As expected, it maintained the short – term interest rate in the range of 0.40% – 0.50%. BoJ Governor Kazua Ueda stated that the bank will continue to adjust the degree of monetary easing, while also highlighting that the underlying inflation remains below 2%. This decision had an immediate impact on the forex market, with the USD/JPY pair gaining momentum in the European morning and trading at a fresh two – week high near 150.00.
Movements in Other Currency Pairs and Commodities
Gold has been on an upward trajectory, benefiting from escalating geopolitical tensions. On Tuesday, it saw a gain of more than 1%, and early Wednesday, the XAU/USD pair continued to climb, reaching a new record – high above $3,040.
The EUR/USD pair had a successful day on Tuesday, posting daily gains and touching its highest level since early October, above 1.0950. Although it entered a consolidation phase, it managed to hold above 1.0900 in the European morning. Later in the trading session, Eurostat is set to release revisions to February inflation data, and several European Central Bank (ECB) policymakers are scheduled to give speeches, which could further influence the pair’s movement.
The GBP/USD pair corrected lower on Wednesday, trading below 1.3000, after closing marginally higher on Tuesday. Market watchers are now looking ahead to Thursday, when the Bank of England will announce its monetary policy decisions.
Key Insights into Fed’s Policies
What the Fed Does and Its Impact on the USD
The Federal Reserve plays a crucial role in shaping US monetary policy. It has two main objectives: ensuring price stability and promoting full employment. To achieve these goals, its primary tool is adjusting interest rates. When inflation rises above the Fed’s 2% target, it hikes interest rates. This increases borrowing costs across the economy, making the US a more appealing destination for international investors. As a result, the USD strengthens. Conversely, when inflation falls below 2% or the unemployment rate is high, the Fed may lower interest rates to encourage borrowing, which can put downward pressure on the USD.
Frequency of Fed’s Monetary Policy Meetings
The Federal Reserve holds eight policy meetings annually. At these meetings, the Federal Open Market Committee (FOMC) evaluates economic conditions and makes important monetary policy decisions. The FOMC is composed of twelve Fed officials, including seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve on a rotating one – year basis.
Quantitative Easing (QE) and Its Impact on the USD
In extraordinary situations, such as during the 2008 Great Financial Crisis, the Fed may implement Quantitative Easing (QE). QE is a non – standard policy measure aimed at boosting the flow of credit in a stagnant financial system. It involves the Fed printing more dollars and using them to purchase high – grade bonds from financial institutions. Generally, QE weakens the US Dollar.
Quantitative Tightening (QT) and Its Impact on the USD
Quantitative Tightening (QT) is the opposite of QE. Under QT, the Fed stops buying bonds from financial institutions and does not reinvest the principal from maturing bonds to buy new ones. This policy usually has a positive impact on the value of the US Dollar.
As the forex market awaits the Fed’s announcements, traders and investors are closely monitoring these developments to make informed decisions in an ever – changing financial landscape.
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