Fed to hold final 2021 meeting today at 7:00 pm GMT ❗
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Fed to conclude a “meeting of the Year” today
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Quicker taper and hints on rate hikes expected
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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
