Market Overview

The final Fed meeting 2021: market expectations and where the surprises could be

Tonight’s FOMC commentary and Powell’s press conference will kick off a series of outcomes and comments from the world’s biggest central banks. The SNB, Bank of England and ECB will present their decisions on Thursday and the Bank of Japan on Friday morning.

The concentration of events runs the risk of triggering a stronger than usual market reaction. Market volatility is ensured if the central bankers do not fall into markets’ expectations. The stock market and the dollar have retreated from their extremes and are consolidating at occupied levels for the past few days, clearing the space for a strong move in either direction.

The Fed prefers to be dull and manage expectations, but the trajectory of expectations of the central bank markets diverges most at pivotal moments like now.

Analysts and traders expect to hear the announcement tonight of doubling the pace of tapering from $15B to $30B a month from January. If that is the case, balance sheet purchases will come to an end as early as April, opening the way for a rate hike as early as the middle of the year. Traders will look for the Fed’s mood on interest rates in the economic outlook accompanying the FOMC commentary.

Where could there be surprises?

The Fed has been slow to acknowledge the inflation problem, calling it temporary, and maybe trying to save face by continuing to point out that peak inflation is near. We risk seeing even more raised eyebrows from traders and analysts if there is no tapering increase. This is a highly favourable scenario for the stock market, which could particularly favour high-tech stocks. However, for the dollar, such an approach by the Fed could trigger a correction after six months of growth. The chances of such a scenario would be much higher if the US markets were highly volatile. Only then could the central bank soften its stance not to provoke unnecessary stress on the financial markets.

It could also be the opposite situation. Powell showed in 2018 that it could be more challenging than participants expected. Rising financial asset prices based on unusually soft monetary policy in a stronger-than-average break from market fundamentals allows for tighter policy. The Fed can launch a correction in equity markets without fear that it will hurt the economy in the coming months. This will also be positive news for the dollar, which may return to growth after a brief pause since late November and even accelerate it on clear signals from the leading central bank.

The FxPro Analyst Team

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