Unveiling Currency Market Dynamics: Leveraging Federal Reserve Communications for Strategic Investment Insights
Abstract
AbstractThe purpose of this paper is to extract market signals for the major currencies (EUR, USD, GBP, JPY, CNY) analyzing the Federal Reserve System (FED) minutes and speeches, and, consequently, making suggestions about going long/short or remaining neutral to investors thanks to the causal relationships between FED sentiment and currency exchange rates. To this purpose, we aim to verify the hypothesis that the currency market dynamics follow a trend that is subject to the sentiment of FED minutes and speeches related to specific relevant currencies. The proposed paper has highlighted two main findings: (1) the sentiment expressed in the FED minutes has a strong influence on financial market predictability on major currencies trend and (2) the sentiment over time Granger-causes the exchange rate of currencies not only immediately but also at increasing lags according to a monotonically decreasing impact.