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FOMC preview: Fed likely to focus on forecasts and forward guidance

The Federal Reserve look unlikely to bring any fresh easing, but could a batch of improved forecasts help drive further dollar weakness?

The Federal Open Market Committee (FOMC) are back in the fray this week, with the latest two-day meeting set to conclude on Wednesday 16 December.

Will the FOMC ramp up easing after the latest ECB action?

Last week saw the European Central Bank (ECB) adjust their levers in a move which left little doubt over their desire to remain highly supportive as we move through this crisis. While November brought plenty of vaccine-fuelled optimism, the current economic outlook remains full of risks as covid restricts businesses activity and consumer spending.

For an economy as reliant upon domestic consumption, the US will continue to suffer until the coronavirus can be brought under control. While the US is expected to lead a huge vaccination programme that could see 50% of their population inoculated by the end of first quarter (Q1) 2021, there will be plenty of economic suffering in the coming months.

This provides a backdrop of economic suffering which will undoubtedly drive a push to mitigate the economic fallout as we enter the final stretch. While the FOMC has already implemented a huge package of easing over the course of the year, the government’s failure to bring another fiscal boost does push the onus back onto Powell et al.

Unfortunately there are few tools left at their disposal, with the bank already employing a policy of rock bottom interest rates (0%-0.25%) and a whopping $120 billion worth of monthly asset purchases ($80 billion of treasuries and $40 billion of mortgage backed securities).

With hopes of a Democrat-led stimulus package next month, there is some hope that the government will be able to force through a fiscal drive that will ultimately take the pressure off the Federal Reserve (Fed). However, in the absence of such support, the Fed will need to ensure markets believe that they stand ready to provide the backstop where necessary.

With that in mind, this forthcoming meeting could be as much about providing supportive forward guidance as anything. Talk of a Bank of Japan (BoJ) style yield curve control (YCC) mechanism appear to be somewhat lofty for now, with the bank unlikely to bring in such a radical measure in the face of an economic rebound.

Fed forecasts provide key factor

The meeting will also see a fresh bout of forecasts from the Fed, with traders on the lookout for any shifts to the gross domestic product (GDP) figure in particular. Obviously there is plenty of room for error in such speculative endeavors, yet with greater clarity over vaccines it is likely we will see an improved 2021 growth figure compared with the September estimate of 4%.

The expectation of a strong recovery throughout the year should also help to drive unemployment forecasts lower for next year. Elsewhere, keep an eye out for any changes to the inflation figures.

Dollar index technical analysis

The dollar index has been under pressure over the course of the past month, with the latest vaccine announcement bringing the greenback into the lowest level since Q2 2018. Much will come down to risk sentiment, with further stimulus from either the government or central bank likely to drive the dollar lower.

A break back up through the 9116 resistance level could bring some reprieve to this current downtrend. However, until that occurs it is likely we will see further weakness come into play.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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