FX Market Volatility Will Return with Vigor in 2015
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Central bank interest rate divergence, geopolitical events, and global growth expectations have been the three primary drivers of FX market volatility in late 2014, and these themes will continue to dominate the currency trade well into 2015.
With so many economic and geopolitical variables in play, it is highly unlikely the FX market will succumb to the historic volatility lows witnessed in the summer of 2014. Moreover, the U.S. Federal Reserve’s decision to turn off the liquidity spigot has propelled currency markets.
Central bank policymakers remain on guard, however. They’re eager to soothe anxious investors who fret about the state of the global economy in an era of monetary intervention that has left financial markets primed for volatility whenever one of the major central banks changes tack.
And though bank officials remain concerned that a sharp fall in asset prices could derail ongoing efforts to foster growth, the possibility leaves them ample room to correct unintended errors in judgment, and to withstand investor herd mentality when panic rises. That puts the onus squarely on central bankers to be clear and concise in their public communications.
A more sustainable sense of market volatility will come about once the Group of Seven central banks’ monetary policies diverge further than what we’re experiencing presently. There is a strong possibility the European Central Bank will initiate a sovereign bond-buying program in the first quarter of 2015 provided Germany approves of the measure. If that happens and it is followed by the Fed’s first real rate hike in the first half of the year, and subsequently the Bank of England (BoE) by the third quarter, market volatility will flourish anew.
With that said, intermittent intraday volatility driven by risk-averse investors will continue, fueled by geopolitical strife, and it will weigh heavily on economic growth data in Europe, Russia, Asia, and the U.S.
Meanwhile, a lack of wage pressure stateside and in the U.K. is pushing post-recession rate hikes in both regions further out the curve. Aside from the U.K. and U.S., if global growth remains tenuous at best, the popular lower-for-longer central bank pledge will stay cemented, but divergence will occur as long as the both countries stay their respective economic courses.
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