What is Quantitative Easing?

What is Quantitative Easing (QE)?

Quantitative easing (QE) is an unconventional monetary policy used when policy rates are already near zero. Acentral bank buys government bonds and other high-grade assets from banks, paying for them with newly created reserves. The goal is to inject liquidity, lower longer-term yields, and encourage lending to households and businesses.

Mechanics of QE

• Asset purchases: The central bank expands its balance sheet, swapping reserves for securities held by banks and institutional investors.
• Portfolio rebalancing: Investors displaced from safe bonds seek riskier assets, pushing up equities and credit.
• Signaling effect: QE communicates that rates will stay low for an extended period, anchoring the yield curve.

FX Implications

QE often weakens the domestic currency in the short run because it increases money supply and suppresses yields. However, if QE succeeds in reviving growth, medium-term currency effects can reverse. Traders compare QE programs across regions—when the Fed tapered in 2013 while the Bank of Japan expanded its purchases, USD/JPY surged higher.

Risks and Critiques

Extended QE can inflate asset bubbles, compress bank profitability, and widen wealth inequality. If investors fear monetization of fiscal deficits, inflation expectations may rise, fueling more pronounced currency weakness. Nevertheless, QE proved pivotal in stabilizing markets during the 2008 financial crisis and the 2020 pandemic shock.

Advanced Guidance

Build a repeatable, rules‑based process so decisions are consistent across sessions and instruments. Start from context (higher‑timeframe structure, positioning, macro tone), then define precise triggers and invalidation on execution charts. Track spread and depth so your order type matches conditions. Pre‑compute scenarios (breakout, fakeout, mean‑revert) and map actions for each to reduce hesitation.

Execution Framework

• Plan entries at levels with confluence (structure, momentum, time‑of‑day).
• Place stops beyond the logical invalidation, not arbitrary distances.
• Target at least 2–3R; scale out methodically and trail remainder.
• Avoid thin liquidity windows unless the setup explicitly requires it.
• Record slippage and spreads; poor fills can erase edge.

Review Loop

• Journal setups by session and pair to learn where they excel.
• Tag trades by catalyst (news, trend continuation, range breakout).
• Recalculate expectancy monthly; prune underperforming variants.

Risk Controls

Keep daily loss limits, reduce size after consecutive losses, and pause during regime shifts. Survival enables compounding; treat discipline and execution quality as part of your edge.