Ahead of the FOMC’s policy decision shortly, most risk assets came off their earlier highs although Bitcoin remained sharply higher and crude oil managed to rise further, boosted by a bigger-than-expected drop in US oil stockpiles. The dollar bounced off its lows, causing the likes of the GBP/USD to give back a decent chunk of its
earlier gains, when Brexit optimism had sent the cable to above the 1.35 handle. The dollar found support on the back of mixed data and short-side profit taking. US retail sales came in sharply below expectations at -1.1% m/m vs. -0.3% expected, while the flash manufacturing PMI was a touch better at 56.5.
Some FX investors clearly took profit ahead of the Federal Reserve policy decision, due at 19:00 GMT, with Jay Powell’s press conference due half an hour later. Don’t forget that New Zealand GDP will come in at 21:45 GMT, followed by Aussie jobs data at 12:30 GMT in the early hours of Thursday. Tomorrow, it will be the Swiss National Bank and the Bank of England’s turn to decide on monetary policy – more details can be found
HERE. Then on Friday, it will be the last major central bank decision in 2020 as the Bank of Japan decides on its policy. So get ready for the central bank bonanza!
Fed weighs short-term risk against vaccine-boosted 2021 outlook
The focus is now turning to today’s main event, the US Federal Reserve’s monetary policy decision. The FOMC is most likely going to keep policy largely unchanged but make subtle changes to keep the stock market bulls happy. Like the ECB, it will undoubtedly ramp up its dovish rhetoric and emphasise the need for more fiscal support due to the still-deteriorating pandemic. Indeed, while the outlook for 2021 has improved due to the rollout of the coronavirus vaccine, the short-term picture has deteriorated. But I reckon that if the Fed were to make any changes, it would be shifting the bulk of its bond-buying to longer maturities given the recent rises in bond yields – all in order to keep long-term yields low. But if the Fed refuses to do this, then we could see a negative reaction in the markets as investors fret about rising bond yields. Even so, the potential negative reaction is likely to be limited as after all, the financial conditions would still remain extremely accommodative and for a long time anyway.
So, heading into the Fed meeting, it is mostly risk-on across the financial markets and I don’t think that will change much. That’s unless the UK crashes out of the EU without a deal and/or the Fed turns out to be surprisingly too hawkish in its policy statement and assessment of growth and interest rates. Consequently, the Dollar Index could resume its down trend.
Source: ThinkMarkets and TradingView.com