Risk ON amid hopes over Brexit and US stimulus ahead of FOMC

Sentiment is supported by many factors today, ranging from deal hopes for Brexit and US fiscal stimulus package, to stronger-than-expected economic data and the potential return of normalcy in 2021. Investors are also expecting the upcoming central bank meetings – starting with the US Federal Reserve today – to provide further boost for risk assets. The banks are expected to keep QE taps wide open and might even tweak their policies further amid fears the recent resurgence of the virus and lockdowns will weigh on short-term economic activity. As result, European stock markets and US index futures were higher, while the pound was rallying sharply amid chatter a Brexit deal was imminent.
 
What’s moving the markets today
 

 
Fed weighs short-term risk against vaccine-boosted 2021 outlook

The main event later today is 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.
 
Pound breaks $1.35 as Brexit hopes deepen

Ahead of the Fed meeting, I could have selected a number of markets for this section of the report. But given the break above the key $1.35 handle, the GBP/USD is definitely the chart to watch for further potential upside as investors continue to price in a Brexit deal. However, if you are trading this market, always ensure you have rigid risk and money management strategies, for there is always the possibility that that the UK could still crash out of the EU without a deal. That said, it looks like the path towards $1.40 has now opened, although the road to that level is likely to be bumpy as investors await direction from both the UK-EU side regarding Brexit, and also the US dollar.

Source: ThinkMarkets and TradingView.com