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Get Ready for Heightened Volatility in the FX Market in November

Mario Draghi dragged his feet last week by not committing to an extension date on the ECB's bond purchase program. The Euro hit four month lows after the ECB meeting.

by Nikolai Kuznetsov

The European Central Bank (ECB) had its monetary policy meeting on October 20, 2016, and it decided that rates would remain unchanged. The interest rates on and the deposit facility, main refinancing operations and the marginal lending facility remained unchanged at -0.40%, 0.00% and 0.25%, respectively. Moreover, the ECB Governing Council expects the key interest rates to remain at its current levels, or even lower, for an extended period.

ECB President Mario Draghi indicated that monetary policy makers are considering an extension to its bond purchase program past March 2017, but there was no actual commitment in the extension. However, Draghi stated that a decision of whether the ECB would continue its bond purchase program would be made in its December 8, 2016 meeting.

Now, since rates remained unchanged and Draghi stated that the governing council didn’t discuss extending its QE program, the euro hit four-month lows. That being said, the ECB decision is behind us, and market participants are focusing on two key events in November.

The FX markets should see heightened volatility with potential changes in U.S. monetary policy and the U.S. Presidential election on November 8, 2016. Although there are trading opportunities in the FX market, you should check out an FX education center before considering any investments.

U.S. Economy in Focus

On October 20, 2016, U.S. Weekly Jobless Claims numbers were released and the economy saw new jobless claims rise by 13,000, week over week, to 260,000, from 247,000. Although there were increased jobless claims week over week, the labor market still shows signs of improvement so far in 2016.

The Fed’s Beige Book was released on October 19, 2016 and showed signs of economic expansion and a tightening labor market. The Federal Reserve’s Boston district stated, “Outlooks are positive, although contacts in several sectors cite the upcoming presidential election as a source of near-term uncertainty, delaying some business decisions.”

Potential Rate Hike in November?

The Fed’s Beige Book release could cause Federal Open Market Committee (FOMC) members to be at a crossroad again during the November meeting. Although many market participants have already decided the Fed won’t raise rates until December, only the FOMC knows what it’s going to do. Despite the FOMC’s divided monetary policy view, several FOMC members said the decision was a “close call”. Additionally, some members indicated that an interest rate hike would be appropriate relatively soon.

If the U.S. economy continues to strengthen, the Federal Reserve will most likely raise rates in its December meeting. However, market participants shouldn’t completely rule out an interest rate hike in November because there’s still a small chance the Fed could decide to raise rates after three members voted for an interest rate hike in September 2016. Until November 2, 2016, we simply won’t know what the FOMC will do, in regards to monetary policy.

Volatility in November

No matter what road the Fed takes, currency markets will fluctuate. Moreover, the FOMC monetary policy meeting will end just less than a week before the U.S. Presidential election. So market participants will most likely see large whipsaws in the FX and equity markets. If the Fed surprises the market with a move to raise rates in November, the U.S. dollar has a high probability of strengthening against other major global currencies. Conversely, the opposite is true. Market Participants should closely follow the FOMC meeting on November 1-2, 2016.

Additionally, on November 8, 2016, the U.S. Presidential election will occur, and FX markets should see large whipsaws after the results are released. Some major currency pairs that market participants should keep an eye on in November are: JPY/USD, GBP/USD, CHF/USD, EUR/USD, SEK/USD and CAD/USD.

*This post was published according to the "Contributed Article Terms and Conditions"

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