Today is the most important day for the markets, because today market players are going to hear what the Fed has to say about their monetary policy. For the first time since the Coronavirus pandemic, the Fed in the US is going to taper its asset purchase programme, which they put in place to ward off the challenges caused by the Covid-19. For market players, this is certainly a big event as this will send a clear signal that the US economy is ready to stand on its feet now.
Currency traders and equity players will be watching the outcome of this event very closely. This is because under a textbook scenario, we should see a strong rally in the dollar index as the Fed is tightening its belt on its monetary policy, and equity markets should take this action as a vote of confidence.
Not Much Strength
In reality though, if we look at the dollar index’s price action for the past couple of days, we have seen little evidence of any strong moves taking place for the dollar index. The reason behind this is that the Fed has done an amazing job in communicating the monetary policy message. For the past number of months, the Fed has been preparing the market for this particular moment, and their intentions have been to reduce the uncertainty in the markets. This particular strategy of the Fed has given traders enough time to adjust their portfolio, and hence we have not seen any significant moves in the dollar index.
Plenty of Volatility
Having said that, this doesn’t mean that the upcoming event isn’t going to bring higher volatility for the dollar, gold prices or for the equity markets. These markets are bound to experience higher volatility later today, and there is still plenty of unknown factors that could take the traders off guard. For instance, one of the most important factors for many traders is how much the Fed will taper and how much they will be increasing that. The second most important question for them is whether we will see the Fed hiking the interest rate in Q2 of the next year, or will it be Q3 of 2022?
Tapering and Interest rate
Hence, it is safe to say that the biggest single factor that is likely to influence the markets the most will be not tapering, but in fact, it will be more about the Fed’s ability to start thinking about the interest rate hikes. So far, market players know that the Fed is likely to be done with their asset purchase programme by mid-next year. If we do get an exact indication of when the Fed will end its tapering, we could see some strength heading for the dollar index as traders will then know the next process is going to be even more bullish for the dollar index as the Fed will increase the interest rates.
A Hawkish or Dovish Message?
We are expecting the Fed to announce that they will taper their asset purchase programme by 15 billion dollars a month. Now, if we do see this number becoming a reality, market players are likely to take that message as a hawkish stance which could bring more strength for the dollar index. Anything less than 15 billion would be considered as a dovish message, and we could see the dollar index losing steam. In simple terms, the larger the tapering amount, the more hawkish message is likely to be.
As for the rate hikes, we believe that the Fed may begin the tapering process by the end of Q2 of next year or perhaps at the beginning of the Q3 of 2022.