FOMC Preview – What can we expect tonight?

Will the FOMC meeting happening tonight (21.00 GMT+2), investors are bracing themselves for a blockbuster event.

With inflationary pressures continuing to rise, Fed watchers expect the policy-setting Federal Open Market Committee (FOMC) to lean into a speedier timeline. On Friday, the Consumer Price Index showed prices rising by 6.8% year-over-year in November — the fastest pace seen since 1982.

For the Fed, which had insisted for most of 2021 that high inflationary readings would be “transitory,” the concern is that it may have to play catch-up to quell any fears of further inflation.

The Fed will set the policy tone for all other central banks to follow, with the ECB and the BOE next off the conveyer belt of key decisions this week. Overall, policymakers have a delicate balancing act between leaving enough policy flexibility to accommodate Omicron risks, while also needing to get a firm grip on surging consumer prices

While the Fed is set to lean hawkish, the ECB and the BOE could be forced to maintain a relatively dovish stance considering the persistent pandemic concerns. This projected policy divergence is likely to keep the euro and the pound on the defensive versus the greenback.

However, this also means that the bar is lower for a hawkish surprise on that side of the pond. Should markets perceive either the ECB or the BOE to be less dovish than thought, that could prompt a rebound in EURUSD and GBPUSD. Overall, the Fed’s expected hawkish inclinations are likely to translate into strong support for the US dollar and it should have little qualms climbing higher if markets price in even more Fed rate hikes for 2022.

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