Year likely to end with a bang as the market eyes Fed interest rate decision

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The market has been eagerly waiting for the December’s FOMC meeting. This is the second time the market is expecting the fed to say something significant about the tapering. Last time in September, the market priced in a reduction of asset purchases, but the outcome was negative, and as a result, the US dollar fell sharply across the board. This time the market is expecting the Fed to be little less dovish, as the incoming data was impressive in the last few weeks.

There is no doubt that the market is nervous, as there is a high-risk of a shocking development. If the fed comes out with a dovish stance, then I expect some nasty moves for the risk-appetite, and the US dollar may lose ground against most of the major currencies. If the fed leaves the market guessing about the tapering like from the last six-months, then also we may see some knee-jerk reaction from the US dollar. Remember, the Fed’s chairman Ben Bernanke will be leaving the Fed’s office very soon, so this will be the probably more watched event than before.

The market’s expectations of tapering in the December’s meeting have increased a lot, as the data for the last few weeks was very impressive. The unemployment rate fell to 7%, which is lowest in the past two years, as can be seen in the chart below.

Moreover, the last two NFP prints were more than 200K, which is the best yearly performance, as can be seen in the chart below. The inflation is also at the stable levels, compared to the last 12 months. There is no denial that the fed has to taper, and they want to taper, as they cannot let it continue to infinity and create a situation when it can cause jitters for the US economy. Some economists believe that the fed has no choice but to taper, as the Fed’s purchases are increasing, and with every increase the complications in the unwinding will rise.

One of the key points to note that the market was expecting a taper in September, as in January, a new chairman will take over. So, making any major change ahead of the January is very unlikely. This means if this theory is correct, then the fed might stay away from any tapering or even taper talks in today’s meeting.

Furthermore, the fed is expected to keep the interest rates unchanged at 0.25%. If there is no tapering, then the most important thing to watch will be the Ben Bernanke’s speech at GMT 07:30 PM. The FOMC statement will be released half an hour before his testimony.

Today, the action may start during the European session, as we have some important risk events lined up for the UK and Germany. The German IFO business climate index will be released at GMT 09:00 AM, which is expected to rise 0.2 points from 109.3 to 109.5. Later, the UK’s employment data and MPC meeting minutes will be released at GMT 09:30 AM, which can cause a lot of volatility in the GBP pairs.

Technically, the EURUSD traded lower towards the 1.3720 support level yesterday, but managed to recover the lost ground later during the NY session. The pair traded as high as 1.3775 level. The pair is currently consolidating in 20-30 pips range. I still believe that if the Euro goes higher, then the bearish pressure will increase. The Euro zone and ECB cannot afford a higher Euro, as it can affect the growth. The 1.3810/30 level still remains a critical for the pair, as can be seen in the 4 hour chart below. A push above can take the pair close to the 1.3900 area. On the downside, the support for the pair lies at around the 1.3720 and 1.3650 levels.

Let’s wait and see how the market reacts to the outcome later in the day.

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