Guest Post by Susan Wade
While 2014 was the year of quantitative easing, 2015 appears set to be the year of far greater economic turmoil, with many investors wary of a rise in the US interest rates.
America to Align With Japan and Europe
It now appears highly likely that the US Federal Reserve will begin to raise interest rates in 2015- a move that will see America align with Japanese and Eurozone fiscal policies.
The move has been a long time coming, especially as the US economy continues to be in good health. Many predict that it will even grow faster in 2015 than it did in 2014. With oil prices collapsing, US consumers now have more money, and this looks set to reinvigorate the economy; especially as America’s economy tends to be domestically driven.
Rate Rises to Spark Volatility in Equities Market
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The rate rise, however, is likely to cause a huge degree of volatility in the markets. Although it is more than likely that such a move will be telegraphed well in advance of its announcement, it is likely that we will see a big sell-off in the equities market due to a lack of preparation for a change in US Monetary Policy. Such fluctuations and potential volatilities are labelled by some as “rate rise tantrums”.
Forex Markets Appear More Stable
In stark contrast to the equity market, the forex market seems well placed and prepared for such a rate rise, with USD currently soaring. Because such a change in fiscal policy is already priced into the market, it appears as though we will see very little volatility in the forex markets when the rate change is announced. However, as always, much of this will depend on the circumstances of the time, so it is worth keeping an eye on the economic calendar (this FxPro.co.uk one gives you a good overview of the events to look out for).
Over in the UK
One place where uncertainty is leading to volatility in the forex markets is the UK. With UK economic growth beginning to stall, it appears less and less likely that the UK will raise interest rates, despite still having a relatively healthy economy.
Of course, further volatility is factored into the UK markets because we are in the midst of an election year, with the country heading to the ballot box in May. With no one party currently having a majority, and with the influence of an external party like UKIP, many investors are currently wary. It’s well worth watching this space.
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Written by Susan Wade