While stock market investors are cursing the Fed, forex traders have never been happier.
It turns out that the Fed is little more than a drug dealer.
And over the last 14 years they’ve been pushing the most addictive drug of all – money.
The Fed’s answer to the 2008 Global Financial Crisis (GFC) was to drop interest rates to nearly 0%.
At the same time, the central bank printed trillions of new dollars that would circulate through the system.
This “one-two punch” was supposed to get the economy off life support. And it worked wonders…
Businesses quickly ramped up hiring, and the unemployment rate dropped from a peak of almost 10% in 2010 to a low of 3.67% by 2019.
We all know what happened next… the world shut down as COVID-19 spread like wildfire…
The Fed responded by doubling down on its 2008-era policies. They dropped rates to rock-bottom levels once again and printed more money than ever before.
In doing so, they set the stage for the forex market to make its big comeback.
That’s why this is the best trading environment I’ve ever seen for forex.
There are big moves in all the major currencies almost every week. That means countless opportunities to make great returns.
You see, interest rates are crucially important to forex traders.
More specifically, forex traders are happiest when there are big differences between the interest rates of the major currencies.
In a post-2008 world, with interest rates so low for all the major currencies, forex trading virtually died off. Many forex-focused hedge funds closed shop and moved to other asset classes.
That’s because it’s easier for central banks to lower interest rates than it is to raise them.
And virtually every major central bank dropped their interest rates to near 0% after the GFC – just like in the aftermath of the pandemic crash.
When every currency’s interest rate is at the same level, there’s very little incentive for traders to want to own one currency over another.
But when one currency has a relatively high interest rate, and another currency has a very low interest rate, that’s when forex traders get excited.
It’s exactly what’s going on right now. To fight surging inflation, central banks are realizing that they must change course.
The days of cheap money at ultra-low interest rates are likely gone for a very long time.
A big problem, however, is that not all central banks can simply raise their interest rates as quickly as some others.
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The weaker a country’s economy, the more painful it’ll be for that country’s central bank to hike rates quickly.
This is a bit of an oversimplification… but the higher the interest rate of a currency, the stronger that currency typically tends to be.
It’s the exact opposite for a currency with a low interest rate.
We’ve seen this theory play out over the last several months between the U.S. dollar (USD) and its European counterparts the euro (EUR) and the Great British pound (GBP).
For example, the euro reached parity with the dollar back in July. The last time this happened was 20 years ago all the way back in 2002.
The pound on the other hand, dropped to a new all-time low against the dollar as recently as September 26.
The USD’s interest rate is currently at 3.25%, while the EUR and the GBP are sitting at 1.25% and 2.25%, respectively.
Since the beginning of the year, the Fed has hiked rates five times, including two outsized hikes of 0.75% each in June and July.
And despite all these rate hikes, inflation is still sitting over 8%. (For reference, the Fed’s target for inflation is 2%.)
That means there’s a lot more pain to come for investors sticking to traditional asset classes like stocks and bonds.
But it means that great opportunities to trade forex are here once again.
This week, I’ll reveal more about my forex trading strategy. So far, it’s off to a perfect start with 13 winners out of 13 trades… proving that this really is the market to be in right now.
Happy trading,
Imre Gams
Analyst, Market Minute
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