💥Can Fed shock markets?

• Fed to announce QE taper today
• Markets speculating about rate increases in 2022
• Decision crucial for markets like Gold, EURUSD and US100
• The Fed decision will be announced at 6pm GMT (7pm CET)
• Powell conference will start 30 minutes after the decision

What will the Fed announce?

The US economy made a huge progress out of the pandemic slump. Domestic demand is much higher than before the pandemic, inflation runs at above 5% and while employment has not recovered fully it’s mostly because companies cannot find new employees. And yet the Fed still continues its crisis-like policies of zero rates and massive bond buying. After months of delays the Committee is bound to announce a “taper” where it will reduce bond purchases progressively each month, probably until the middle of 2022.  

What will investors be looking for?

For investors the taper itself is no longer a “game-changer”. With inflation proving much less transitory than the Fed thought the focus is on interest rates. Investors speculate about 2 to 3 interest rate hikes in 2022 which is in stark contrast to fairly recent statements from president Powell suggesting no rate hikes until 2023. One could therefore point out at 3 scenarios:

Dovish Fed – QE taper by $15 billion a month and maintaining that rates will not increase in 2022

Neutral Fed – QE taper by $15 billion a month and leaving the rates decision open

Hawkish Fed – QE taper by more than $15 billion a month and/or clear suggestion of 2022 rate hike   

How could markets react?

EURUSD

The pair has been seating at a support zone of 1.15-1.16 and it’s clear that the Fed could provide a trigger for a bigger move. Inability to move lower recently plus Dovish Fed could create a perfect mix for a strong rebound while Hawkish Fed could provide arguments for a decisive break below 1.15.

GOLD

Gold prices have been stuck in consolidation and there’s good reason for it. On one hand, heightened inflation should be bullish for Gold but then again monetary tightening has been historically negative. This just highlights how important the FOMC decision will be. Hawkish Fed means fighting inflation and could be negative for Gold, at least in the short term. Dovish Fed means tolerating inflation and could be a spark for a bull market. First key support is at $1720 while crucial resistance to watch is $1835.

US100

Tech-based US100 should be the most sensitive to the Fed decision. Looking at the chart one can see an extended “b” wave of a potential running “abc” correction. Hawkish Fed could fit into that scenario and trigger a corrective wave “c”. Obviously Dovish Fed would be the best case scenario for equities and especially for US100.