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Tin Hat Time In FX Markets



  • Federal Reserve has room on its balance sheet to resume QE should it so choose.
  • If the Fed were to restart QE, we would expect the dollar to undertake a much deeper decline.
  • ECB and BoJ would struggle to resist EUR and JPY strength.

By Chris Turner, Global Head of Markets and Regional Head of Research for UK & CEE

Continued pressure in global equity markets sees an on-going flight to safety in the FX world. What’s different this time is that the market may be starting to price in a fresh round of QE from the US Federal Reserve, which is a clear dollar negative

Market moves to price a Fed Funds rate at 0.25%

Continued pressure in global equities sees investors rotate into safe-haven assets, particularly in high-quality sovereign bonds, and price an aggressive policy response from central bankers with room to cut.

As you can see in the chart below, our Rates Strategy team highlights how the market has shifted to price the Fed Funds rate at 0.20% later this year – effectively the zero lower bound. Markets are now asking what next from the Fed? Another QE programme? Certainly, the Federal Reserve has room on its balance sheet to resume QE should it so choose, given that its balance sheet is now just 19% of GDP versus the 26% peak in 2014.

Markets shift to pricing the Fed Funds rate at 0.20% within six months

ING Rates Strategy Team

Fed QE would be a game changer for the dollar

QE programmes have been some of the biggest drivers in FX regime shifts over the last decade. The Fed enjoyed first-mover advantage in 2009, with its initial programmes sending EUR/$ to 1.50. As conviction grew of the ECB belatedly starting a QE programme, EUR/$ fell 20 cents in 2014.

The spread of Covid-19, its economic impact and the policy response remain highly uncertain, but it seems as though the FX markets are starting to price in the Fed’s money printing presses being properly fired up again.

If the Fed were

This article was written by

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