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3 Ways A Dovish FED Impacts The Futures Markets

October 3, 2019 by Daniels Trading| Tips & Strategies

The month of July 2019 proved to be a pivotal time for monetary policy in the U.S. An escalating U.S.-China trade war threatened to destabilize economic growth and raised questions about the future of international commerce. In a preemptive strike, the U.S. Federal Reserve (FED) reduced the Federal Funds Target Rate by ¼ point ― the first such move since 2008.

So, how does dovish FED policy impact the futures markets? Although the implications can be extensive, there are three primary market-related areas that may be influenced dramatically. Let’s take a look at each aspect and break down how FED quantitative easing affects the futures markets.

#1 Strength in Equities

Quantitative easing (QE) is the expansion of the open market operations conducted by a country’s central bank. Under QE, central banks purchase government securities and reduce prime lending rates to stimulate economic activity. As a result, the money supply is increased, and capital becomes more readily available for consumption as well as industrial growth.

Equities products are one of the largest beneficiaries from QE. Stock values typically rise following periods of relaxed monetary policy because investors take a positive view of forthcoming growth prospects. Over time, this concept has been substantiated, especially as it relates to the S&P 500. Since 1990, the S&P 500 has posted an average 0.57% gain in the month following a ¼ point reduction.

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From the standpoint of futures, dovish FED actions can lead to strong short- and intermediate-term rallies in popular equities-based products. It’s not uncommon to see bullish price action in the E-mini S&P 500, E-mini DOW, and E-mini NASDAQ following any sort of dovish FED activity.

#2 Bearish Pressure on the USD

The very nature of QE is closely related to the valuation of money itself. In practice, an increase in the money supply by a central bank works to devalue the domestic currency. From a business standpoint, this can be beneficial because it promotes a competitive edge in the export sector and aggregate economic growth.

However, devaluations negatively impact currency futures. For the USD, values against foreign currencies, such as the Euro, Swiss franc, and Canadian dollar, can fall as a result of dovish FED policy. Products such as the Euro FX (6E), Canadian dollar FX (6C), and USD Index futures (DX) can experience heavy volatility as investors hedge against risks facing the Greenback.

#3 Rallies in Safe-Havens

Given the growth in equities and “risk-on” sentiment typically stimulated by a dovish FED, it’s a bit counterintuitive to also expect strength in safe-haven assets. However, this phenomenon has been historically prevalent during cycles of QE. Values of traditional safe-havens — such as gold, the Swiss franc, and Japanese yen — have a tendency to appreciate in value. Accordingly, gold futures, as well as the Swiss franc FX and Japanese yen FX, have a tendency to gain market share versus the USD.

The most recent example of this scenario was the strong rally from CME December gold futures during the rate cuts of summer 2019. From 1 May to 31 August, gold futures rallied more than $225 per ounce as uncertainty over FED policy boosted investor angst. While there were other important underpinnings driving the bullish action, the accommodative FED tone certainly played a key role in the breakout.

Want to Learn More About the FED?

Without a doubt, actions from the U.S. Federal Reserve are an integral part of the futures markets. A sudden change of official policy, as well as subtle clues, are capable of spiking action across a variety of asset classes. From the E-mini S&P 500 to full-sized gold futures, the impact of a dovish FED can be profound.

A great place to learn more about the FED and stay current on policy is the online educational suite at Daniels Trading. Featuring webinars, blogs, and expert insights, it’s a valuable resource for anyone looking to boost their futures IQ.

Daniels Trading Market Spotlight

Filed Under: Tips & Strategies

About Daniels Trading

Daniels Trading is an independent futures brokerage firm located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 1995, Daniels Trading is built on a culture of trust committed to the firm’s mission of Independence, Objectivity and Reliability.

Risk Disclosure

THIS MATERIAL IS CONVEYED AS A SOLICITATION FOR ENTERING INTO A DERIVATIVES TRANSACTION.

THIS MATERIAL HAS BEEN PREPARED BY A DANIELS TRADING BROKER WHO PROVIDES RESEARCH MARKET COMMENTARY AND TRADE RECOMMENDATIONS AS PART OF HIS OR HER SOLICITATION FOR ACCOUNTS AND SOLICITATION FOR TRADES; HOWEVER, DANIELS TRADING DOES NOT MAINTAIN A RESEARCH DEPARTMENT AS DEFINED IN CFTC RULE 1.71. DANIELS TRADING, ITS PRINCIPALS, BROKERS AND EMPLOYEES MAY TRADE IN DERIVATIVES FOR THEIR OWN ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS. DUE TO VARIOUS FACTORS (SUCH AS RISK TOLERANCE, MARGIN REQUIREMENTS, TRADING OBJECTIVES, SHORT TERM VS. LONG TERM STRATEGIES, TECHNICAL VS. FUNDAMENTAL MARKET ANALYSIS, AND OTHER FACTORS) SUCH TRADING MAY RESULT IN THE INITIATION OR LIQUIDATION OF POSITIONS THAT ARE DIFFERENT FROM OR CONTRARY TO THE OPINIONS AND RECOMMENDATIONS CONTAINED THEREIN.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE. THE RISK OF LOSS IN TRADING FUTURES CONTRACTS OR COMMODITY OPTIONS CAN BE SUBSTANTIAL, AND THEREFORE INVESTORS SHOULD UNDERSTAND THE RISKS INVOLVED IN TAKING LEVERAGED POSITIONS AND MUST ASSUME RESPONSIBILITY FOR THE RISKS ASSOCIATED WITH SUCH INVESTMENTS AND FOR THEIR RESULTS.

TRADE RECOMMENDATIONS AND PROFIT/LOSS CALCULATIONS MAY NOT INCLUDE COMMISSIONS AND FEES. PLEASE CONSULT YOUR BROKER FOR DETAILS BASED ON YOUR TRADING ARRANGEMENT AND COMMISSION SETUP.

YOU SHOULD CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES AND FINANCIAL RESOURCES. YOU SHOULD READ THE "RISK DISCLOSURE" WEBPAGE ACCESSED AT WWW.DANIELSTRADING.COM AT THE BOTTOM OF THE HOMEPAGE. DANIELS TRADING IS NOT AFFILIATED WITH NOR DOES IT ENDORSE ANY TRADING SYSTEM, NEWSLETTER OR OTHER SIMILAR SERVICE. DANIELS TRADING DOES NOT GUARANTEE OR VERIFY ANY PERFORMANCE CLAIMS MADE BY SUCH SYSTEMS OR SERVICE.

GLOBAL ASSET ADVISORS, LLC (“GAA”) (DBA: DANIELS TRADING, TOP THIRD AG MARKETING AND FUTURES ONLINE) IS AN INTRODUCING BROKER TO GAIN CAPITAL GROUP, LLC (GCG) A FUTURES COMMISSION MERCHANT AND RETAIL FOREIGN EXCHANGE DEALER. GAA AND GCG ARE WHOLLY OWNED SUBSIDIARIES OF STONEX GROUP INC. (NASDAQ:SNEX) THE ULTIMATE PARENT COMPANY.

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Risk Disclosure

THIS MATERIAL IS CONVEYED AS A SOLICITATION FOR ENTERING INTO A DERIVATIVES TRANSACTION.

THIS MATERIAL HAS BEEN PREPARED BY A DANIELS TRADING BROKER WHO PROVIDES RESEARCH MARKET COMMENTARY AND TRADE RECOMMENDATIONS AS PART OF HIS OR HER SOLICITATION FOR ACCOUNTS AND SOLICITATION FOR TRADES; HOWEVER, DANIELS TRADING DOES NOT MAINTAIN A RESEARCH DEPARTMENT AS DEFINED IN CFTC RULE 1.71. DANIELS TRADING, ITS PRINCIPALS, BROKERS AND EMPLOYEES MAY TRADE IN DERIVATIVES FOR THEIR OWN ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS. DUE TO VARIOUS FACTORS (SUCH AS RISK TOLERANCE, MARGIN REQUIREMENTS, TRADING OBJECTIVES, SHORT TERM VS. LONG TERM STRATEGIES, TECHNICAL VS. FUNDAMENTAL MARKET ANALYSIS, AND OTHER FACTORS) SUCH TRADING MAY RESULT IN THE INITIATION OR LIQUIDATION OF POSITIONS THAT ARE DIFFERENT FROM OR CONTRARY TO THE OPINIONS AND RECOMMENDATIONS CONTAINED THEREIN.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE. THE RISK OF LOSS IN TRADING FUTURES CONTRACTS OR COMMODITY OPTIONS CAN BE SUBSTANTIAL, AND THEREFORE INVESTORS SHOULD UNDERSTAND THE RISKS INVOLVED IN TAKING LEVERAGED POSITIONS AND MUST ASSUME RESPONSIBILITY FOR THE RISKS ASSOCIATED WITH SUCH INVESTMENTS AND FOR THEIR RESULTS.

TRADE RECOMMENDATIONS AND PROFIT/LOSS CALCULATIONS MAY NOT INCLUDE COMMISSIONS AND FEES. PLEASE CONSULT YOUR BROKER FOR DETAILS BASED ON YOUR TRADING ARRANGEMENT AND COMMISSION SETUP.

YOU SHOULD CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES AND FINANCIAL RESOURCES. YOU SHOULD READ THE "RISK DISCLOSURE" WEBPAGE ACCESSED AT WWW.DANIELSTRADING.COM AT THE BOTTOM OF THE HOMEPAGE. DANIELS TRADING IS NOT AFFILIATED WITH NOR DOES IT ENDORSE ANY TRADING SYSTEM, NEWSLETTER OR OTHER SIMILAR SERVICE. DANIELS TRADING DOES NOT GUARANTEE OR VERIFY ANY PERFORMANCE CLAIMS MADE BY SUCH SYSTEMS OR SERVICE.

GLOBAL ASSET ADVISORS, LLC (“GAA”) (DBA: DANIELS TRADING, TOP THIRD AG MARKETING AND FUTURES ONLINE) IS AN INTRODUCING BROKER TO GAIN CAPITAL GROUP, LLC (GCG) A FUTURES COMMISSION MERCHANT AND RETAIL FOREIGN EXCHANGE DEALER. GAA AND GCG ARE WHOLLY OWNED SUBSIDIARIES OF STONEX GROUP INC. (NASDAQ:SNEX) THE ULTIMATE PARENT COMPANY.

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