European and US stock futures are trading lower as investors are hesitant to place any bigger bets ahead of the most important event of the day—the Fed meeting. We are likely to see higher volatility in the dollar index, gold, and the US stock market.
It is pretty much given that no one is expecting any new action from the Federal Reserve today. Jerome Powell, the Fed Chairman, will announce the US monetary policy. Even though there are fears that the US economy may be heading towards a double-dip recession, traders are not expecting anything new from the Fed today as the interest rates are already sitting near their ultra-low level.
Steadiness is expected from the Fed, which is why we are not seeing any upward move for the dollar index. The index is literally lifeless, which is why we are consistently seeing the stock market holding on to its gains. Traders know that the Fed is not sitting on the sidelines. In fact, the Fed is monitoring the situation very carefully, and they are ready to provide an extra cushion if there is any deterioration in the health of the US economy. One sign of this will be in the US GDP data, which will be released tomorrow.
One particular thing that investors will be paying attention to during the press conference is if the Fed will acknowledge that December was difficult for the US economy, particularly for the US labour market. We saw the US unemployment numbers creeping up once again in December.
In addition to this, consumer spending also fell for the third consecutive month. There was, and there is still a lot of pessimism about economic recovery due to the new variant of coronavirus. Covid cases went through the roof during the last month; causing many US states to implement tougher restrictive measures.
So, traders would like to know what the Fed is going to make all of this. The fact is that despite the above factors, the Fed still doesn’t have sufficient reason to lower the interest rate any further or increase the asset purchase programme. After all, there are only limited bullets in the Fed gun, and they want to be careful with them.
What Can Rattle The Markets?
The failure of acknowledging the fact that coronavirus is still posing an enormous threat to the US economy and just being more optimistic about the new president’s administration can rattle the market. If the Fed doesn’t say that the recovery path is still full of obstacles, which it is, the dollar index could move higher because traders will think that the Fed is overly optimistic about the US economy.
A Cohesive Message
Another factor that can break the stock rally and push the dollar index higher is if there is any change of heart among the Fed members in terms of increasing the interest rates. Previously, there has been some noise in the market that some Fed members want to increase the interest rate sooner than later. They believe that we do have a coronavirus vaccine now, and the economic recovery should continue to improve. They are also keeping tabs on the fiscal policies. Joe Biden is looking to get another massive stimulus package from lawmakers. If this aid package is approved, it is very likely that the US economic recovery may get a further boost. Hence, the disagreement among the Fed members can shake the confidence among investors. As a result of this, we could see the stock market selling off.