It seems like a long time since a Fed meeting has generated as much excitement as the one that began yesterday, and today we will learn the outcome. FOMC members have to consider many issues, including pandemics, the impact of cost inflation on producers, inflation on consumers, the price-wage spiral or the position of cryptocurrencies.
That's why today's Fed announcement will be so important not only for US business and citizens, but also for the dollar. The Fed's new macroeconomic projections, which show the median expectations of FOMC members, may point to two hikes in 2022, and may support the notion of the Fed moving into monetary tightening mode. Additionally, there will likely be a lot of interest in how the Fed now addresses inflation - after Powell said that the characterization of it as transitory should be withdrawn.
Meanwhile, the money market seems to already have nearly three 25bp hikes priced in for the next 12 months. If the Fed meets or exceeds market expectations, the US dollar may get wind in its sails and rise again on a wave of strengthening, especially against low interest rate currencies, for which the market does not estimate the possibility of interest rate increases. We are talking in particular about the euro or the Japanese yen. Meanwhile, if the Fed is more conservative and the possible pace of interest rate increases is lower than the market expects, the wave of USD sell-off could be quite wide, and one of the main beneficiaries could be gold.
In contrast, ahead of both the Fed and Bank of England decisions, sterling rose above $1.325 on Wednesday as inflation data increased concerns about rising inflationary pressures in the UK. British consumer inflation rose more than expected to 5.1 percent in November, the highest level since September 2011, and producer prices jumped 9.1 percent, the most since September 2008. Still, the pound remained close to its lowest level since November 2020 as the Bank of England is expected to opt for caution over the imposition of tighter COVID-19 restrictions in England due to the rapid spread of the Omicron variant. Additionally, Prime Minister Boris Johnson has warned of a wave of Omicron and announced an acceleration of the country's immunization plan after the U.K. raised its alert level due to a surge in Covid cases.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Forex service)
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