An increase in volatility is expected in the currency market today since the Fed will summarize the results of its December meeting and announce its decision on the prospects for monetary policy at the end of the US trading session.
This is clearly the most important event in the life of dollar pairs. Today's verdict of the Fed can determine the vector of movement of the US currency for several weeks (or even months) ahead. Traders are too demanding of the American regulator: in their opinion, the members of the Committee should not only approve the early completion of QE today but also announce a double (or even triple) increase in the interest rate within the next year. As a rule, such hawkish requests are not satisfied by the Fed – at least in the expected volume. Therefore, the risk of a weakening of the US dollar is quite high today, even if the Federal Reserve announces an acceleration of the reduction of the stimulus program, which is very likely. This decision should go in conjunction with the announcement of an aggressive tightening of monetary policy in 2022. Only in this case, the US dollar will be able to organize another large-scale rally.
EUR/USD traders froze in anticipation of the result of the Fed meeting, trading in a fairly narrow range. Over the past week, the pair has consistently pushed off from the borders of the price level. This is already a kind of ritual: the pair enters the area of the 13th figure daily but ends the trading day invariably at the level of 1.1300.
Such indecision of market participants is quite justified. The situation is extraordinary and even unprecedented. Indeed, as a rule, the inflated expectations of traders are not justified, they do not find their response from the Fed. However, the prevailing fundamental background suggests that this time, the "requirements" of market participants are adequate and commensurate.
In particular, the Fed's most preferred inflation indicator – the index of personal consumption expenditures (PCE). It significantly exceeds the target level of the regulator for the first time in a long time. It is believed that this indicator is monitored by members of the American regulator with a special predilection. The basic PPI index, which does not take into account volatile food and energy prices, rose in October to 4.1% in annual terms. At the same time, the result of September was revised upwards (from 3.6% to 3.7%). In August, July, and June, the indicator came out at 3.6%. Taking into account energy and food prices, the price index increased by 5% compared to October last year. This is the fastest growth rate of indicators since the 90s.
The US consumer price index also demonstrates irregular growth. In November, it accelerated to 6.8% yoy. This is the maximum value of the indicator for the last 39 years. The core consumer price index, excluding volatile food and energy prices, rose to 4.9% in annual terms. In this case, we are talking about a 30-year record. Inflationary pressure is widespread – prices are rising for food, energy, housing, cars (both new and used), and medical care.
Such trends suggest that the Fed may indeed take a more aggressive position today, thereby justifying the forecasts of the "hawks". Moreover, even contradictory Nonfarm data can be interpreted by members of the Committee in favor of tightening monetary policy, although the number of employed in November increased by only 210 thousand with a forecast of growth of 530 thousand. On the other hand, the unemployment rate in the United States declined to 4.2%, and the share of the economically active population increased to 61.8%. In turn, salaries came out "at the level" – in particular, the average hourly wage increased by 4.8% year-on-year.
As already known, the growing risk of prolonged and high inflation forced Jerome Powell to initiate an early end to QE. However, the main intrigue of the December meeting is something else: are the members of the Committee and the head of the Fed himself ready to go further? Are they ready for an aggressive rate hike? A positive answer to this question will allow the US dollar to increase its pressure throughout the market, while a negative one will send it to the bottom. But a third, "combined" option is also possible, in which the point (median) forecast will reflect the willingness of Committee members to raise the rate twice in 2022, but at the same time, Jerome Powell's rhetoric will be cautious and uncertain. In this case, it is difficult to predict the market reaction – the pendulum can swing both in the direction of the US currency and in the opposite direction.
In this case, the market expects the Fed to be assertive. For the first time in a long time, the expectations/demands of traders are really justified and fair. But whether the Fed will go beyond the "announced program" is an open question. Therefore, it is better not to trade the EUR/USD pair (as well as other dollar pairs) today: there are too big bets at stake and too high a degree of uncertainty.
