Currency Point: Tis the Season to be tapering

As mentioned last week, the December FOMC meeting can be a lively affair. Now last Wednesday wasn’t the biggest event we have seen but it was one of the biggest single even moves we have seen in years (it is coming from record levels of stimulus).

The Fed is going to double the pace of tapering to $30 billion per month from $15 billion, meaning completion will now be March a full three months ahead of the original schedule. That speed could get faster still if the US economy continues to fly.

Then there is the story out of the Dot Plots

As the chart shows there are now three projected rate hikes of 25 basis points in 2022 up from a consensus one. The Dot Plots also show that a further three hikes are expected in 2023.

Growth and inflation projections were both upgraded for 2022 with growth projections increasing from 3.8 per cent to 4.0 per cent. Inflation for this year now up to 5.3 per cent from 4.2 per cent and PCE inflation at 2.6 per cent from 2.2 per cent in 2022.

These are clearly all above the Fed’s long-run targets so there should be no surprise on the possible changes to policy in 2022. But it’s the speed and potential size of the increases that will be challenging – 6 hikes in 2 years are a solid hand brake to growth.

The Board is continuing to give itself ‘wiggle room’ stating as it has since the Pandemic began that supply and demand imbalances were contributing to elevated price levels. The Fed believes vaccinations and easing supply constraints should support growth in the economy and employment, it should also reduce the pressure in inflation eventually. The risks to the outlook remain, new variants and a long tail to the COVID-era.

USD seesawed after the FOMC decision, then slid in the close of the week.

EUR/USD fell to $1.1222, then post the ECB rebounded to $1.136 at the end of the week. This is the 3rd time the pair has failed to drop below $1.12 it’s becoming a strong resistance level.

GBP/USD dipped to $1.3173 then rocketed off to $1.3374 in the 24 hours post the FOMC. This too is strong rejection of the falling trend in the pair.

AUD/USD slipped to $0.7093 but then like its European peers rocketed off to hit $0.7224.

Has the Fed caused a trend reversal in the USD? The coming few weeks will bring us the answer.

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