Risk appetite remained low, putting additional nervousness in the market ahead of the Fed meeting scheduled for this week. Many expect that during the meeting the central bank will announce the speed up of tapering, but that will not be the highlight of the summit. The most important topic is whether the Fed will reconsider its plans for interest rates, which will definitely be raised in 2022. An earlier increase will make inflationary pressures cool down a bit, but could harm the stock market and the bond market.
The Fed will also announce its plan to counter rising inflation, after which it will release its quarterly forecasts. Most likely, around 18 officials will forecast two rate hikes next year.
It was Fed Chairman Jerome Powell that said tapering should be sped up, along with the tightening of monetary policy. Currently, interest rates in the futures market are projected to rise by 66 basis points at the end of next year, while bond purchases will be reduced to $ 30 billion a month. This means that economic stimulus will end in March 2022. The rationale for such a decision is the recent improvements in the labor market and inflation.
That is why several interest rate increases are scheduled for 2022, three in 2023 and two more in 2024. In this situation, the rates will reach the level of 1.9%, representing a slightly steeper trajectory than the FOMC forecast in September.
As noted above, the change in Powell's outlook was driven by the persistent surge in inflation. Recent data showed that consumer prices rose 6.2% in October and 6.8% in November, the fastest since 1982.
For the prospects for 2022, the FOMC is likely to revise its forecast to 2.5%. The unemployment rate, meanwhile, is set to reach 3.7% by the end of 2022, which will be below the long-term forecast of 4%. Economists also expect the Fed to keep its promise that it will not raise interest rates until "peak employment" is achieved in the US.
But most Fed officials believe that it is too early to determine the economic impact of the new strain of coronavirus, as there is a high chance that a slowdown will be seen because of the strain.
Nevertheless, so far, producer prices in the United States is up 9.6% y/y and 0/8% m/m, the largest growth since 2010. Apparently, there was significant growth in goods and services.
Core PPI, which excludes food and energy prices, also rose 0.7% and 7.7%, respectively. The spike in prices is directly related to supply chain problems that have risen due to problems with logistics. However, many businesses have passed these additional costs onto their customers through higher prices, which will surely have an impact on consumer inflation in the coming months.
That is why prices for goods were up 1.2% in November, while the cost of services jumped 0.7%. The cost of goods in intermediate demand also increased by 1.5% m/m and rose 26.5% y/y.
Talking about EUR/USD, a lot depends on 1.1265 because its breakdown will lead to a further fall to 1.1230 and 1.1190. Meanwhile, a confident breakout of 1.1380 will provoke a rise above 1.1315.
GBP
Pound took advantage of good data on the labor market and tried to break through the weekly highs, but failed. The report indicated that companies in the UK were expanding their jobs in November at a record pace, resulting in the fall of the unemployment rate. On the one hand this is good, but on the other hand the numbers fuel the Bank of England's concerns about the unstable rise in inflationary pressures.
The report also said that the vast majority of laid-off workers found work when support ended, which was the key goal of the central bank.
To be more specific, jobs increased by 257,278 in November, the highest figure ever recorded. The unemployment rate, meanwhile, fell to 4.2%. And even though wage growth slowed to 4.9%, this is to be expected as the boom in the labor market is gradually peaking.
Now, many are anticipating the Bank of England meeting on Thursday, where policy decisions will be made. Most investors are betting that there will be no changes on interest rates, mainly due to the threat posed by the omicron strain.
Talking about GBP/USD, a lot depends on 1.3185 because its breakdown will lead to a further drop in the pair. Meanwhile, a rise above 1.3255 will provoke a jump to 1.3290 and 1.3320.
