HOW FX REACTS AS GOVERNMENTS, CENTRAL BANKS RESPOND TO GEOPO

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HOW FX REACTS AS GOVERNMENTS, CENTRAL BANKS RESPOND TO GEOPOLITICAL & ECONOMIC STRESS



For economies with a high degree of capital mobility, there are essentially four different sets of policy-mix alternatives that can provoke a reaction in FX markets following an economic or geopolitical shock:To get more news about maverickfx review, you can visit wikifx.com official website.
　　Scenario 1: Fiscal policy is already expansionary + monetary policy becomes more restrictive (“tightening”) = Bullish for the local currency
　　Scenario 2: Fiscal policy is already restrictive + monetary policy becomes more expansionary (“loosening”) = Bearish for the local currency
　　Scenario 3: Monetary policy already expansionary (“loosening”) + fiscal policy becomes more restrictive = Bearish for the local currency
　　Scenario 4: Monetary policy is already restrictive (“tightening”) + fiscal policy becomes more expansionary = Bullish for the local currency
　　It is important to note that for an economy like the United States and a currency like the US Dollar, whenever fiscal policy and monetary policy start trending in the same direction, there is often an ambiguous impact on the currency. Below we will examine how various fiscal and monetary policy remedies for geopolitical and economic shocks impact currency markets.
SCENARIO 1 - FISCAL POLICY LOOSE; MONETARY POLICY BECOMES TIGHTER

　　On May 2, 2019 – following the FOMC decision to hold rates in the 2.25-2.50 percent range – Fed Chair Jerome Powell said that relatively soft inflationary pressure noted at the time was “transitory”. The implication here was that while price growth was below what central bank officials were hoping for, it would soon accelerate.The US-China trade war played a role in slowing economic activity and muting inflation.
　　The implicit message was then a reduced probability of a rate cut in the near term, given that the fundamental outlook was judged to be solid and the overall trajectory of US economic activity seen to be on a healthy path. The neutral tone struck by the Fed was comparatively less dovish than what markets had anticipated. This might then explain why the priced-in probability of a Fed rate cut by the end of the year (as seen in overnight index swaps) fell from 67.2 percent to 50.9 percent after Powells comments.
　　Meanwhile, the Congressional Budget Office (CBO) forecasted an increase in the fiscal deficit over a three-year time horizon, overlapping the central bank‘s would-be tightening cycle. What’s more, this came against the backdrop of speculation about a bipartisan fiscal stimulus plan. In late April, key policymakers announced plans for a US$2 trillion infrastructure building program.
　　The combination of expansionary fiscal policy and monetary tightening made the case for a bullish US Dollaroutlook. The fiscal package was expected to create jobs and boost inflation, thereby nudging the Fed to raise rates. As it happened, the Greenback added 6.2 percent against an average of its major currency counterparts over the subsequent four months.

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