Daily FX 15.12.21: FED Headlines Will Trigger Further Volatility In Pound Vs Euro, Dollar
Fed Statement to Dominate Near-Term Market Moves, GBP/USD Dependent on Short Covering to Make Further Headway
The clash between expectations and central bank policy statements, together with market positioning ahead of Thursday’s big events, will be key elements on Wednesday.
The Federal Reserve is expected to adopt a hawkish policy stance which should underpin the dollar, but the strong statement may already be priced in and limit the potential for further buying.
Omicron developments will also continue to be watched closely in the short term.
Given evidence of very high transmissibility, the on-going data on the severity of illness and rates of hospitalisation will be extremely important for risk sentiment.
Pound US Dollar Exchange Rate Outlook
The Pound to Dollar (GBP/USD) exchange rate was again able to find support close to 1.3200 on Tuesday and secured a tentative net advance.
The Pound was also supported to some extent by the fact that expectations of a Thursday BoE rate hike have already been priced out which limited the potential for further selling.
GBP/USD also moved higher to trade above 1.3250 after the much higher than expected CPI inflation data with a headline rate of 5.1%, the strongest reading for 10 years. There is also the possibility of short covering ahead of Thursday’s BoE statement.
Nevertheless, GBP/USD is unlikely to make strong headway unless the Federal Reserve fails to meet market expectations. A very hawkish Fed stance could also push GBP/USD to 2021 lows, at least temporarily, especially if Omicron fears intensify.
Euro (EUR) Exchange Rates Today
The Euro-zone economic calendar will remain empty on Wednesday with markets looking ahead to Thursday’s ECB policy statement.
Markets expect that the central bank will remain committed to a very expansionary monetary policy and net yields will remain negative for the single currency.
The Euro could still gain an element of support from a reduction in short positions if global risk appetite remains fragile, but the Euro to Dollar (EUR/USD) exchange rate was held around 1.1275.
US Dollar (USD) Exchange Rates Outlook
The dollar secured a net gain on Tuesday with support ahead of the Federal Reserve policy decision while markets could see little alternative to the US currency.
The Federal Reserve is expected to announce that it will reduce asset purchases at a faster pace given inflation concerns.
There will be updated economic forecasts with the main focus on interest rate projections by individual Fed members.
Markets expect that there will be a further upgrade and projections of at least two rate hikes in 2022.
ING notes the importance of Fed communication “New Dot Plots that show a Fed median expectation of two hikes in 2022 will very much support the notion of the Fed moving into tightening mode (we haven’t said that for a while) and there will be plenty of interest as to how the Fed now refers to inflation – after Powell said its description as transitory should be ‘retired.’”
ING expects the dollar will make further headway; “Three weeks of consolidation should have been enough for the dollar to correct overbought technical conditions and today’s Fed meeting should be the catalyst for an upside breakout.”
Commodity currencies were vulnerable on Tuesday with further unease over the potential impact of the Omicron variant.
The Pound to Canadian dollar (GBP/CAD) exchange rate advanced to a 10-day high above the 1.7000 level.
The Pound to Australian Dollar (GBP/AUD) and Pound to New Zealand Dollar (GBP/NZD) exchange rates also secured weekly highs around 1.8630 and 1.9660 respectively before fading slightly.
Risk conditions will remain a very important element for commodity currencies.
The Day Ahead
There will be tentative trading conditions during the European session with caution ahead of the Federal Reserve policy announcement.
After the Fed announcement, there will be volatile trading across asset classes.
The US will, however, release its latest retail sales data which will trigger some volatility.
Canada will release its latest inflation data on Wednesday with the headline CPI rate forecast to remain at 4.7%.
Overnight, New Zealand will release its latest GDP data for the third quarter with a sharp decline expected due to the coronavirus lockdowns. Australia will also release the latest labour market report with expectations of a sharp employment increase of around 200,000.
The Swiss National Bank and Norway’s Norges bank will release their latest policy statements early on Thursday.