Contrarian Trading Practices with an Eye to Easier Profits

Fed chair, Janet Yellen is expected to act decisively on Wednesday, 15 March 2017. On that date, the Fed will have concluded its 2-day meeting of FOMC members. At the heart of the meeting is the state of the US economy and whether the Fed can adopt monetary policy to stabilize and strengthen the status quo. Recall that the Fed has several overarching objectives as it plots out its monetary policy agenda. Foremost among them are price stability, and full employment. To achieve these objectives, the Fed must adopt policies that help to grow the economy without allowing it to overheat. An overheating of the economy takes place when aggregate demand exceeds aggregate supply.

Currency Traders Back the Greenback

Excess demand is a feature of the current US economy, and that’s precisely why the Fed is looking to put the brakes on to prevent inflation from rising too quickly. The Fed has been targeting an inflation rate of 2%, and we are rapidly approaching that level. As a trader, there are many reasons to be excited about Fed policy. For starters, a rate hike (increase to the Federal Funds Rate) will boost the attractiveness of the US economy to foreigners. This will mean capital inflows will take place at a rapid rate. Foreign currency such as the GBP, EUR, JPY, ZAR, CNY, and others will be sold en masse to purchase USD. Naturally, greater demand for the greenback will result in a sharply appreciating currency, coupled with reciprocal declines in competing currencies.

Wall Street Bulls are Charging

As far as trading activity goes, Wall Street indices are faring well. The Dow Jones Industrial Average is hovering around the record-shattering 21,000 level, the NASDAQ Composite Index is at 5,853.77, and the S&P 500 index is at 2,373.75. These levels are phenomenal. In fact, the 1-year performance of major US bourses is up between 18.58% and 24.33% overall. Across the Atlantic, only the FTSE 100 index and the DAX can claim similar gains. The FTSE (the UK premier index) is up 18.72% over 1 year, while the German DAX is up 22.31%. How will these indices be affected by a rate hike in the US? This is an important question to ask as a trader, and one that warrants careful analysis of the most appropriate binary options strategy . As a contrarian investment vehicle, the binary route allows traders to simply forecast the direction of price movement of currency pairs, indices, commodities or assets. Instead of profiting off the nominal increases or decreases, only the right direction is required to lock in fixed gains.

What are the chances of a Fed rate hike in March?

While nobody can predict with 100% certainty what Fed chair Janet Yellen will announce on Wednesday, 15 March, the consensus is that she will pull the trigger. Fed chair Yellen has been dropping hints about how strong the US economy is, and the need to bolster economic performance with stabilizing monetary policy. The days of accommodation appear to be well behind us. This means that further cuts the interest rate are going to be replaced by increasing interest rates and a tightening of monetary policy. No further bond or asset purchases are on the horizon in the US. This means we are going to see Fed policy targeting a stabilization of monetary policy with interest rates moving up 25-basis points in the region of 0.75% – 1.00%.

When the Financial Times conducted a survey on raising interest rates, the majority of those polled expected the Fed to act by June 2017 at the very latest, with a large number anticipating a May rate hike and a smaller number anticipating a March rate hike. When it comes to the federal funds rate by the end of next year, many are expecting the FFR to be 2.625%, with a median FFR of 2.125%. As a trader, this news is a godsend. First of all, it should be used to maximum effect on banking and financial stocks which will balloon out of control with higher interest rates. Additionally, demand for the USD will increase and commodities like gold will likely take a hit from a stronger greenback and higher interest rates.