Forward guidance is a monetary tool used by major central banks to prevent volatility in the markets when policy decisions are made, clear and consistent communication from respected leaders have successfully calmed the markets following the tapering tantrum of 2013.
Unfortunately, no such tool exists when we are dealing with geopolitical factors stemming from the US and North Korea. Such tension has escalated since President Trump entered the oval office, on Wednesday we reached a new level with threats of an attack on the US territory of Guam. This has left the markets anything but calm, fear is prevalent and rightfully so. Safe heavens such as Gold, US treasuries and the Japanese Yen are taking away from equity markets.
It’s unknown how long the selloff will last, perhaps we can expect a continuation in this downward trend in equities and a rise in heavens if further steps are taking by either party. Dollar gains made from the Job openings yesterday were stripped away due to the news on Wednesday.
One may ask how central banks react to such political factors, indeed such facets are not part of the mandate however they need to be considered, evidently we can see Chairman Janet Yellen referring to international factors when addressing the outlook. Perhaps during such geopolitical tension central banks will keep policy loose? If this is true then it’s not consistent with the hawkish tone coming from the bank of England in the face of Brexit, its anyones guess where currencies and equities are headed.
One thing for sure is that North Korea and President Trump needs to be watched carefully in the coming days, as mentioned there is no guidance in such areas and traders may expect volatility. Investors will be looking ahead at Crude inventories data released later today which may affect the dollar, dollar traders need to be kept on their toes amid monetary and geopolitical factors.
By Ian Kelly – Market Analyst, Avatrade