What to expect from the Fed ❓

11:53 am 15 December 2021

Fed to hold final 2021 meeting today at 7:00 pm GMT ❗

  • Fed to conclude a “meeting of the Year” today

  • Quicker taper and hints on rate hikes expected

  • Decision at 7pm GMT, conference 7:30

 Why is the FOMC meeting important?

There is a consensus among investors that record or near record asset valuations are in a large part a result of unprecedented monetary policy. Central banks responded to the COVID crisis with zero or negative interest rates and massive money printing, forcing investors to accept higher risk in their chase of returns. However, a lot has changed since early 2020, especially in the US. The economy fueled by record stimulus rebounded very quickly and became overheated. Whenever you look the data is inflationary – demand is super strong, business confidence is highest in 2 decades, inflation in nearly 4 decades and unemployment claims lowest on record. There’s no longer an excuse for the Fed to delay normalization and this could be the end of the “supportive” policy.   

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Initial claims as a percent of the US population are the lowest on record that spans over 50 years. Source: Macrobond, XTB Research

What will they do?

The easy part is taper. The Fed is expected to double the pace of QE reduction (to $30 billion per month) and end it within the first quarter. They will also hint at higher rates via the dot-plot – the chart included in post meeting materials. But provided that faster taper is there (very likely) the focus will be on post-meeting conference as investors will try to figure out if market expectations on the first rate hike in May are warranted.

How can markets react?

More restrictive FOMC policy is generally positive for USD and negative for equities and precious metals. However, bear in mind that investors already expect hawkish Fed. To trigger such reaction the Fed would need to be even more hawkish (for instance, stressing that labour market conditions have been met and now the focus is on inflation). On the other hand, even if there is faster taper but the Fed is vague on interest rates, markets may actually react in the opposite direction.

US100

US100 has been underperforming other Wall Street indices amid threat of quicker policy normalization from Fed. Index dropped to the 78.6% retracement of upward move started at the beginning of December. An upward correction was launched later on but it was nowhere near as big as the previous largest upward correction in the current downward impulse. Support zone ranging above 15,850 pts is a key to watch in near-term. 

Source: xStation5

GOLD

Moves on the gold market were mostly limited to $1,770-$1,790 since the beginning of December. Apart from a false downside breakout at the start of the month, gold price was moving sideways, unable to deliver a bigger move in either direction. A drop below the lower limit of the range occurred this morning but bulls attempt to push the price back above it. Market is currently pricing in 2 Fed rate hikes for 2022. Should Fed's dot-plot fail to live up to those expectations today, gold price may find itself under pressure.

 

Source: xStation5

EURUSD

EURUSD reached a fresh weekly low yesterday in the evening as traders bet on post-FOMC USD strengthening. The main currency pair is trying to recover today but the scale of rebound is quite minor. A mid-term support zone ranging between 61.8% retracement of late-November upward move and 1.1265 will be key should Fed provide USD a boost. Note that ECB is also set to announce monetary policy decision this week (Thursday, 12:45 pm GMT) but it should not have as big of an impact as today's FOMC decision.

Source: xStation5

The content of this report has been created by XTB S.A., with its registered office in Warsaw, at Prosta 67, 00-838 Warsaw, Poland, (KRS number 0000217580) and supervised by Polish Supervision Authority ( No. DDM-M-4021-57-1/2005). This material is a marketing communication within the meaning of Art. 24 (3) of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (MiFID II). Marketing communication is not an investment recommendation or information recommending or suggesting an investment strategy within the meaning of Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC and Commission Delegated Regulation (EU) 2016/958 of 9 March 2016 supplementing Regulation (EU) No 596/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the technical arrangements for objective presentation of investment recommendations or other information recommending or suggesting an investment strategy and for disclosure of particular interests or indications of conflicts of interest or any other advice, including in the area of investment advisory, within the meaning of the Trading in Financial Instruments Act of 29 July 2005 (i.e. Journal of Laws 2019, item 875, as amended). The marketing communication is prepared with the highest diligence, objectivity, presents the facts known to the author on the date of preparation and is devoid of any evaluation elements. The marketing communication is prepared without considering the client’s needs, his individual financial situation and does not present any investment strategy in any way. The marketing communication does not constitute an offer of sale, offering, subscription, invitation to purchase, advertisement or promotion of any financial instruments. XTB S.A. is not liable for any client’s actions or omissions, in particular for the acquisition or disposal of financial instruments, undertaken on the basis of the information contained in this marketing communication. In the event that the marketing communication contains any information about any results regarding the financial instruments indicated therein, these do not constitute any guarantee or forecast regarding the future results.

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