Risk Assets Rally Hard on FMOC Statement

Markets have been somewhat lackadaisical all week, however the FOMC statement drove some larger moves in the Australian Dollar, the Pound and Gold. The FOMC announced this week that they would continue to scale back their purchases of bonds and mortgage-backed securities by a combined 10 Billion next month. The Federal Reserve will now purchase 35 Billion of the securities in July, rather than the current 45 Billion. Markets were not surprised by the news, however the dovish tone of Fed Chair Janet Yellen sparked a rally in risk assets.

The Aussie rallied over a cent on the statement, rising to 0.9430 yesterday, though the move was felt most strikingly in the price of Gold, which has rallied 500 pips since the announcement. It is not clear whether the rally was sparked by the news that the FOMC was reducing stimulus by a further 10 Billion, or whether it was more driven by the dovish tone of Chair Yellen’s speech – the rally began at the time of the announcement rather than the press conference that followed.

The room for different interpretation is due to conflicting opinions on what fundamentals drive gold strength. A common interpretation is that Gold rises due to easy monetary policy, or what is often referred to as “money printing” as well as continued low interest rates. In this frame of reference the rally was driven by Yellen’s dovish tone and the need to keep extraordinary measures further in to the future.

Another interpretation is that Gold moves as a safe haven, similar to US Treasuries, and finds demand when there is greater uncertainty or systemic risk. Given this view on the fundamentals, the rally may have been driven by the further withdrawal of stimulus measures, as well as greater uncertainty regarding global markets in the absence of the Fed’s liquidity measures.

In other news, the BoE bank rate votes went as expected, with no MPC members voting to change rates. There was some volatility around the event, however traders were reluctant to follow through with any lasting movement in the currency with the important FOMC Statement due in the following hours. The Pound rallied hard on the release, to finish up over a cent at 1.7060.

The trading week finishes quietly, though there may be some Yen volatility around BoJ Governor Kuroda’s speech later today.


Photo Credit: Flying Jenny via Compfight cc
Forex Market Review – Gold Rallies Hard
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