Quantitative Easing 2: Updates, Rumors, and Predictions

ForexNewsNow | Published on November 3, 2010 at 11:30 am

Federal Reserve Open Market Committee MeetingNEW YORK (Forex News Now) – The eyes of FX traders everywhere are on Washington this morning as the global market eagerly – and worriedly – anticipates the announcement from the Federal Reserve on quantitative easing 2 (QE2).

The announcement, set to be released at 2:15 pm ET, will likely unveil a new stimulus plan for the sluggish American economy that will more than likely impact the dollar as well as other global currencies.

Analysts are mixed regarding what, exactly, will be announced by the Federal Open Market Committee, the organ of the Federal Reserve tasked with controlling monetary policy.  The consensus estimate is that the FOMC will begin to purchase $500 billion worth of securities and assets over the next six months – but even then, there are questions that remain.

One question that FX traders have asked is whether or not the package will be open-ended.  Will there be an opportunity for additional purchases and increased liquidity at a later date? Or, will the program be a one-shot deal that will likely have less of a negative impact on the dollar compared to a prolonged buying campaign?

There are even rumors that the Federal Reserve will go another route altogether and surprise the market by announcing something unexpected, such as a new inflation or growth target, or even strong suggestions of raising interest rates.

Of course, all of this is, as of now, speculation.  One thing that is certain, though, is that the announcement will impact currency markets here and abroad – and has already done so.

Generally speaking, quantitative easing measures usually provide downward pressure on a domestic currency because they temporarily devalue the currency by essentially printing money (what happens when a government entity purchases its own securities).

This means that the dollar will likely subside, but the reactions of FX traders in other markets – particularly the euro zone – will be of interest.  The euro has performed exceedingly well against the dollar since a low in May, and the FOMC announcement today will likely spur continued gains.

But, these gains could be short-lived if the purchasing package is less than expected, which could lead to erosion in EUR/USD.  There is also the possibility that economic events over the last week and into the next two months will expose the euro zone’s peripheral debt problems once again.

As of now, the consensus prediction holds: The Fed will announce a $500 billion stimulus package, and the dollar will respond by dropping against all major currencies.

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