Forex trading caused the USD/JPY to rise modestly on Feb. 11, after global market participants reacted to the testimony that Janet Yellen provided when speaking with Washington lawmakers.
The greenback rose to as much as 102.71 yen during the session, according to Reuters. This figure compared to the exchange rate of 102.33 that was obtained the day before.
Labor market challenges noted
The new chair of the Federal Reserve, who officially took the helm of the central bank earlier this month, testified before the House Committee on Financial Services. She emphasized that while the labor market has done some mending over the last several years, there is a lot of work left to do.
Yellen also noted the key role that inflation plays in the policy decisions of the Federal Open Market Committee. She emphasized that the schedule that will be harnessed to taper quantitative easing is certainly not written in stone.
Continued use of easing expected
One market expert told Bloomberg that the comments of the Fed chair indicate a plan to maintain the use of bond purchases.
“Her message was continuity of policy and, matching that with continuity of outlook, suggests they remain on the same course,” Keith Hembre, who currently serves as chief economist for Minneapolis-based Nuveen Asset Management LLC and previously worked as a Fed researcher, told the media outlet.
Regardless, one market expert emphasized that the new chair of the Fed is perceived by many as being a major supporter of easy money policy, according to MarketWatch. Greg Anderson, who works for BMO Capital Markets as global head of foreign-exchange strategy, said that the statements made by Yellen did not lean in any particular direction.
“The underlying presumption is that she’s a megadove. So anything that doesn’t jive with that is a surprise,” he told the news source.
Shaun Osborne, who works for TD Securities in Toronto as chief foreign exchange strategist, provided his interpretation of Yellen’s comments to Reuters, which is that economic conditions will need to improve significantly before she lowers the monthly bond purchases.
“The clear message here is that the bar to doing less tapering is very high,” he told the media outlet.
Market experts are weighing in on the future of QE at a time when the Federal Reserve’s balance sheet has risen to more than $4 trillion over the last several years. Some have voiced concerns that the policies of the central bank will cause inflation to flare up.
Fortunately, these worries have not been realized, and Yellen even mentioned that the price level has been growing more slowly than the Fed would like.
Forex trading and QE
What might be far more relevant to those who engage in forex trading is the impact that the central bank’s bond purchases could have on the value of the greenback relative to other currencies.
Every time the Fed buys more bonds, it is causing the U.S. money supply to increase in scope. If the pace of QE is reduced, that means that the total amount of money circulating in the U.S. economy is growing at a slower rate.
Since Yellen is seen by many as being very dovish and a substantial advocate of bond purchases, the neutral tone of her statements helped the greenback to enjoy a brief spike, according to MarketWatch. The dollar has been thought of as being pushed lower as a result of the Fed’s use of stimulus.
Jobs data and Fed stimulus
One major concern that could have an impact on the pace that the FOMC uses in reducing its stimulus is how strong job creation is in the coming months.
The data released by the U.S. Department of Labor for December and January has been lackluster, and has shown only a minor improvement in the job market, the media outlet reported. Yellen said that the figures provided by the government agency for these two months were somewhat shocking to her. However, she emphasized that Fed policymakers will have time to figure out the pace of tapering.
The FOMC announced plans to reduce its current pace of bond purchases at the conclusion of the policy meetings it held in January and December. At the end of the former event, the Fed indicated its plans to reduce its transactions to $75 billion per month.
Then, at the conclusion of the second meeting, the FOMC indicated that beginning this February, it would purchase $65 billion worth of debt-based securities every month. These figures compare to the $85 billion that the Fed had been purchasing each month since late in 2012. During the time when the central bank was conducted these transactions, Ben Bernanke, who was chair of the Fed at the time, stated multiple times that the regimen of bond purchases could be tapered soon.
If economic conditions give the central bank enough reason to taper QE more quickly, such a situation could impact forex trading and motivate those involved to push the U.S. dollar higher relative to other currencies.
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