USD gains as traders predict a pause in Fed policy!

Weekly Market Outlook: FOMC, ECB and BoE Meetings Highlight the Week

Weekly Market Outlook A busy week for global markets ahead of the holiday season packed with policy decisions from major central banks and key data release. The Fed will be leading the marathon with an expected change in the policy track for next year. Central banks in the UK, Eurozone, Japan and Switzerland will be meeting also this week. 

Highlights of The Economic Calendar

  • RBNZ Gov Adrian Orr Testimony 
  • GBP Inflation Numbers
  •  CAD CPI 
  • USD Retail Sales
  • FOMC Meeting 
  • NZD GDP Data
  • AUD Job Market Data 
  • SNB Policy Meeting
  • GBP Rate Decision 
  • ECB Meeting 

Fed is Expected to Announce Faster Tapering 

The Federal Reserve has already stepped into the tightening phase announcing $15 bn reduction in asset purchases last month. Given the recent economic developments, it seems like all set for rate increase next year. It is widely expected to keep interest rates unchanged in December’s meeting. Market expectations for a rate hike settles at 2.2% in contrast to 97.8% supports no rate change, according to the FedWatch Tool. 

The US economy is performing well; inflation is at 30 years high; the labor market is recovering and sentiment levels are improving. Recently, several FOMC members have announced their support for speeding up the tightening process in order to tame soaring inflation. 

The Fed will likely announce plans for a faster unwinding of monetary stimulus enacted last year. The updated dot plot should be more influential on the US Dollar. Market participants will closely watch if the FOMC projections are aligned with market consensus of two to three rate hikes in 2022. 

BoE Rate Hike in Doubt 

December rate hike expectations have recently faded due to the fresh uncertainty around Omicron and the return of pandemic restrictions. The BoE is more likely to hold off a rate hike this week. The December rate hike was almost certain before the Omicron outbreak. Rising economic uncertainty may urge the central bank to push the upcoming rate hike to early 2022. Hawkish BoE members have expressed concerns over the possible economic outcomes of Omicron. 

However, interest rate expectations split on a possible move in December due to high inflation and stable economic growth so far. Inflation figures for November will be released ahead of BoE’s meeting on Thursday. Annual inflation is expected to jump from 4.2% to a new high of 4.7% with core index rising to 3.8%. 

As staying on hold is a possible option, all eyes will turn to the guidance given at the meeting. If the bank expects to be on track to rising rates, that is likely to support the GBP. On the other hand, delaying the tightening steps will weigh on GBP. 

ECB: All Eyes on Forward Guidance

The ECB is a different story. Policymakers are less worried about inflationary pressure, despite admitting it may be more persistent than previously expected. The debate at the upcoming meeting is over the bond-buying programme after the PEPP stimulus comes to an end next March. The asset purchase is currently at 20 bn euros a month. 

Weekly Market Outlook - ECB

Given the bank’s affirmation that asset purchases will end shortly before interest rates start to rise, any hints about tapering or exiting the stimulus programme will trigger sooner rate hike expectations.

The European Central Bank kept policy unchanged during its October meeting, and again pledged to keep interest rates at record-low levels until inflation rises back to the ECB’s 2% target. Policymakers also stated that they continue to judge that favorable financing conditions can be maintained with a moderately lower pace of net asset purchases under the PEPP than in the second and third quarters of this year.

ECB President Christine Lagarde pushed back against market expectations of interest-rate hikes next year even with inflation proving more enduring than previously anticipated. “While the current phase of higher inflation will last longer than originally expected, we expect it to decline in the course of next year.” Lagarde stated in the press conference.

BoJ and SNB: Another Non-Event Meetings

The Bank of Japan is expected to keep its ultra-loose monetary policy intact for another meeting. The board is anticipated to hold the short-term interest rate target at -0.1% and the 10-year bond yield target around 0% to stimulate the economy and boost inflation that has been well below the central bank’s 2% target over the past years. The economy still far away from full recovery, burdened by the pandemic fallbacks, making it harder for the BoJ to join the tightening cycle anytime soon.  

The same applies to the Swiss National Bank that is not seen to give up its ultra-loose monetary policy in the foreseeable future. The bank is widely expected to keep interest rates in the negative territory at -0.75% while reiterating that the franc remains highly overvalued. Both Swiss Franc and Japanese Yen are likely to show minimum reaction to monetary policy meetings. As safe haven currencies, they will remain vulnerable towards risk appetite. 

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