US and European futures are trading lower as investors assess the risk of a shift in Federal Reserve‘s dovish policy. The stock market is likely to trade in a sideways pattern as not many will be willing to take too much risk ahead of the big event. The Fed is going to announce its monetary policy, and this could be the first time that we may hear some hawkish comments from them as the economic health has improved since their last meeting.
So far market players are betting on one thing, and that is the promise which the Chairman of the Federal Reserve has made—keeping the monetary policy unchanged. Speculators believe that there is sufficient recovery in the US, and there is no need for aggressive dovish monetary to remain in place. But time will only tell what the Fed thinks about this.
There is no doubt that the Fed Chairman is going to be peppered with questions today. There are two major questions that matter the most for the market.
Firstly, does the Chairman of the Fed still sees inflation as transitory, and will the GDP and inflation forecast will be in line with this view? Secondly, traders would like to know if other Federal Reserve committee members are also on the same page with him. This means could the interest rates remain the same next year?
Market players certainly do not think so.
The recent currency strength expressed in the dollar index value is primarily because traders believe that the dot plot is going to change today. In 2022, we are likely to see an interest rate hike. However, if this message is not reflected in the dot plot today, then we could expect some serious sell-off for the dollar index.
Another central bank that is also going to be on the traders’ radar today is the Bank of England. The BOE will be announcing its monetary policy tomorrow, and traders believe that there will be a much bigger gap between the BOE’s monetary policy and the ECB.
Of course, some of this could be mainly due to the UK’s progress on the coronavirus vaccine front. Europe is still far behind in achieving its vaccine target. This is the reason that last week we saw the ECB talking about further increasing the asset purchase programme. But the BOE is highly unlikely to adopt that narrative. The bank is likely to maintain its monetary policy, and in fact, it may actually show some optimism about the economy.