Forex
The QT will inevitably affect the currencies due to pumping huge amounts of money out of the financial system. Officially, this process is called sterilization. What can happen to the market this summer can be judged by the results of the first round of the QT program.
In 2017 the program along with the increased interest rates led to successful reverse of the EURUSD pair chart. When sterilization was only $10 billion per month, the QT didn’t affect the Forex that much. However, the volumes gradually increased.
Withdrawals of $30 billion led to a steady increase in the DXY index. Other currencies began to suffer from the excessive strengthening of the USD. In 2018, President Donald Trump asked to cancel the QT program as his main goal was the growth of the stock market.
Since withdrawals are expected to reach $100 billion per month in 2022, we might expect a sharp strengthening of DXY. In this case, the value of the USD might reach EUR, as the ECB adheres to a loose monetary policy and will have nothing to counter the US.
Until the official start of the QT program, there will be no changes in the market. Until the summer, you should rely on other fundamental factors. However, from June it is worth getting ready for the growth of USD. A long-term main trend can bring significant profits to traders using the martingale strategy.
Stock Market
The actions of Donald Trump, aimed at strengthening the stock market, led to their record growth. However, the trade war with China has led to a strong decline in their value. At that time, the amount of withdrawal of funds had reached $50 billion a month. Only the cancellation of the QT program allowed some indices (such as NASDAQ and S&P 500) to return to their highs.
At the moment, the stock market is at a fairly attractive level, but charts are expected to decline to 2021 levels. If this happens before the beginning of June, there are two things to keep in mind:
- This rebound may slightly mitigate the consequences of the sterilization.
- The market will enter a state of high volatility. Make adjustments to your risk management system.
Cryptocurrency Market
In 2017, the price of bitcoin reached $20,000. Yet, by 2018, its price had fallen by 80%. It is difficult to say whether such a drop is related to the QT program, since it coincided with other events unfavorable for cryptocurrencies:
- Mass ICO ban
- Ban on crypto exchanges in China
The course of cryptocurrencies as a whole depends on many factors, including the implementation of the code and the level of adoption of a coin. You can always make good money on some of them.
The value of bitcoin, on the other hand, is highly dependent on the price of USD and DXY. A new round of the QT program could cause bitcoin to drop by 80% and return to its previous highs only after a few years.
Conclusion
It is highly likely that the quantitative tightening program will be closed earlier than in the announced three years, since in two years President Joe Biden will try to restore the economy in order to be re-elected. In the meantime, it is worth remembering that QT will inevitably affect all markets. By the beginning of summer, make sure to review your risk management system and trading strategies.