FOMC meeting preview: Threading a needle
Matt Weller, CFA, CMT December 14, 2020 11:48 AM
How will Fed Chairman Powell and Company weigh the near-term economic risks against the rosier medium-term outlook?
As we kick off the final full trading week of 2020, traders will be focused on a busy calendar of economic data, as well as major central bank meetings including from the Federal Reserve.
As my colleague Joe Perry noted in his Week Ahead report, the economic calendar gets off to a slow start before kicking into high gear midweek (see a full list of market-moving events on our economic calendar):
- Eurozone, UK, and US PMI surveys
- US Retail Sales
- * FOMC Monetary Policy Meeting and Press Conference *
- AU Employment report
- BOE Monetary Policy Meeting and Press Conference
- BOJ Monetary Policy Meeting and Press Conference
- UK Retail Sales
While the PMI surveys on broad economic activity and retail sales reports will be noteworthy, the most important scheduled events for traders to watch this week will be Wednesday’s Federal Reserve
When it comes to the Federal Reserve, Chairman Jerome Powell and Company will have to thread a tight needle: the economic recovery is stalling as COVID resurges across the northern hemisphere, but the prospects for a strong recovery in 2021 is growing as vaccines roll out. Muddying the waters further, the prospects for near-term fiscal stimulus remain up in the air with Congress and the White House still at odds over the details of such a program.
Speaking generally, the Fed’s most likely proactive move would be to extend the average maturity of its asset purchases. Currently, the central bank is buying $80B of Treasury bonds and $40B of agency MBS per month if (and it’s a big “if”) the central bank feels that it must act this week, officials may opt to buy more longer-term Treasury bonds in an effort to keep a lid on future inflation expectations.
While an increase in asset purchases cannot be ruled out, the central bank is more likely to “look through” the temporary economic disruptions like a COVID-driven slowdown this winter, especially as most of the Fed’s tools impact the economy only after 3-6 months anyway. Alternatively, the central bank could simply deem its current programs sufficient for now and make no immediate changes to policy.
Potential market implications
Regardless of what the Fed decides, markets are likely to be volatile as traders seek to profit on the last major scheduled economic event of the year. The base expectation is the that the Fed will tweak the maturities of its asset purchases, so Powell and Company take that path, market moves will likely be limited with perhaps a dash of US dollar weakness and support for US indices.
The more interesting trading scenarios emerge if the US central bank refrains from making any changes (a decision that would likely push the greenback higher and US indices lower) or increases asset purchases (which would likely extend the buck’s recent downtrend and boost US indices to record highs).
USD/JPY in particular looks coiled for a big move if the Fed surprises traders. The pair has spent the last month consolidating in a 100-pip range between 103.70 and 104.70, despite the US dollar’s continued weakness against other rivals. If the Fed opts to stand pat, USD/JPY could see an upside breakout and move toward 106.00, while an expansion to the central bank’s asset purchases could take USD/JPY down through 103.00 to test the lowest levels since the initial COVID swoon in March:
Source: TradingView, GAIN Capital
Learn more about forex trading opportunities.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.