FOMC In Focus

Heading into the December, the FOMC meeting later today, expectations are firmly geared towards a hawkish outcome. With US inflation soaring again last month, unemployment hitting fresh cycle lows, and a broad slate of other leading indicators also reflecting strong upward economic trajectory, the market is looking for the Fed to increase the pace of tapering. Indeed, commentary from various Fed members over recent weeks has further encouraged this view. Several Fed policymakers have voiced their support for stepping up the pace of tapering in light of the ongoing inflationary surge. We have also heard mention of rate hikes being brought forward consequently, with this in mind the focus today will not only be on the Fed’s decision, but also on its forecasts and guidance. Given that an increase in tapering is widely expected, for USD to rise, guidance and forecasts will need to reflect a clear hawkish shift.

Rates Markets Reprice, Will Dot-Plots Match?

Rates markets have been repricing heavily since the November meeting, bringing forward rate hikes into earlier next year along with increasing the projected the number of rates hikes, now standing at five by the end of 2023. With this in mind, the market will be closely watching to see how the Fed’s own dot plot forecasts have shifted since the last meeting. Given developments recently, the dot plots are certainly likely to have been revised higher. However, the issue is that given the high level of hawkish expectations within the market currently, should the Fed’s own forecasts not match up with the markets, this might create disappointment within the USD bull camp, leading to short term unwinding.

Outlook & Forward Guidance To Be Key

The focus will also be on the Fed’s outlook and guidance. Given the emergence of Omicron as a threat, there is the risk that the Fed strikes a more cautious tone than bulls are looking for. While in the US, the response to Omicron has not been as outwardly panic-stricken as in the UK, central bankers nonetheless must acknowledge the residual risks around the pandemic and the uncertainty which still lingers on the horizon. If US bulls are frustrated with a more reserved outlook from the Fed then, again, given the level of hawkish expectation, this might result in a USD unwind near-term, paving the way for higher prices in risk assets.

Technical Views

S&P 500

The S&P is currently sitting in a holding pattern just under the all-time higher. Given that the market is inalong term bull trend and remains supported by the bull channel support line, the focus is on a continuation higher and an eventual breakout above 4692.75, targeting a move up to 4937.50 next. Any USD downside form today’s meeting might well provide the catalyst for such a move.