Fed Signals Rate Hikes To Come

Dec 16 21, 09:25 GMT

The USD despite some volatility caused by the Fed’s interest rate decision remained relatively stable against some of its counterparts yesterday. In the interest rate decision’s accompanying statement, the bank has announced a faster tapering of its QE program practically doubling the taper, while in its renewed dot plot signaled three rate hikes in 2022 to reach 0.75%-1.00% level. Also, the bank flagged the downside risk posed by the Omicron variant yet expectations for an acceleration of growth are still present.

As for financial releases the market focus is on the release of the preliminary Markit PMI readings for December for France, Germany, Eurozone, UK and the US making the day pretty busy for traders. On the USD side we also note the release from the US of November’s construction data, the weekly initial jobless claims, December’s Philly Fed Business index and the industrial production growth rate for November.

EUR/USD remained in a sideways motion yesterday and reaffirmed the validity of the 1.1300 (R1) and the 1.1225 (S1) levels. We maintain a bias for a sideways motion yet ECB’s interest rate decision could alter the pair’s direction. Should bulls take over we may see EUR/USD breaking the 1.1300 (R1) line with the next possible stop being the 1.1370 (R2) resistance level. Should the bears take over, we may see the pair breaking the 1.1225 (S1) support line and take aim for the 1.1165 (S2) level.

BoE: To hike or not to hike?

Pound traders focus on the release of BoE’s interest rate decision later today and currently GBP OIS implies a probability of 64.44 % for the bank to remain on hold at 0.10%, yet that is far from certain. Inflationary pressures are building up in the UK and at the same time we must note that the Fed’s hawkish turn seems also to provide cover for BoE to hike rates. On the other hand, the uncertainty of the Omicron variant and the stricter measures announced by the UK Government seem to advise caution for the bank. Should the bank actually proceed with a rate hike, we may see the pound getting some substantial support, while should the bank remain on hold, we may see the pound retreating.

GBP/USD remained in a sideways motion yesterday between the 1.3160 (S1) and the 1.3280 (R1) levels. We maintain our bias for a sideways motion to continue currently given also that the RSI indicator below our 4-hour chart is near the reading of 50, yet we highlight BoE’s interest rate decision as a risk event that could alter the pairs’ direction. Should more buying orders be placed for cable we may see the pair breaking the 1.3280 (R1) resistance line and aim for the 1.3430 (R2) level. Should a selling interest be displayed by the market we may see the pair breaking the 1.3160 (S1) line and aim for the 1.2990 (S2) support level.

Other highlights for today

Yet it’s not all about the BoE today we also note the release of the interest rate decisions of Eurozone’s ECB, Norway’s Norgesbank, Turkey’s CBT, Switzerland’s SNB and during tomorrow’s Asian session Japan’s BoJ. Turkey’s CBT which has cut rates in its last meeting and there were reports that the banks’ Governor hinted towards another rate cut in December’s meeting. Should the bank actually proceed with another rate cut we may see the TRY weakening further as the aggressive easing of the bank continued. Please note that the TRY has been weakening in the past two days and despite CBT’s intervening in the markets to actually support the TRY, the bearish tendencies for the Lira seem to be ongoing.

On the other hand, we expect SNB and BoJ to maintain an accommodative monetary policy while Norgesbank is expected to hike rates by 25 basis points. Last but not least the ECB is being pressured to start tightening its monetary policy as inflation rates are accelerating yet on the other hand the spreading of the pandemic seems to advise caution. Should the bank maintain a wait and see position we may see the EUR weakening.

EUR/USD H4 Chart