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In a day full of central bank decisions, the EURUSD could break higher

Market Brief

By the end of today, the last full week of trading in 2021 will hopefully come to an end with some clarity on which way the central banks are planning on taking monetary policy into 2022. Last night the FOMC decided to speed up the tightening and where the Fed lead, the rest usually follow. There is a short-term correction in the US dollar, but I would expect the DXY to rise again before long.

Yesterday, the Federal Reserve announced that it would end its pandemic-era bond purchases in March, clearing the way for three interest rate hikes by the end of 2022. While the labour market is undergoing a steady recovery, policymakers are concerned about persistently high inflation. Fed Chair Powell has completely pivoted away from the inflation is transitory but is reluctant to say the Fed is behind the curve. He still believes that the ability to support the system and change rates is enough to control inflation. The market reaction in the equities market may have taken a lot of traders by surprise but it would seem they believe these actions will curb rising inflation and is a sign that the economy is getting back to normality.

At the London open the forex heatmap is signalling a risk-on day, much like the end of yesterday’s US session. We have already received data from Australia which showed the employment change beat expectations and rose by 366.1K which knocked unemployment down to 4.6% and below analysts’ predictions. The Aussie is largely weaker against its peers but is strengthening against the weaker US dollar. The rest of the day is packed with Tier-1 data from several central banks, UK & German Flash Manufacturing PMI’s.

Today’s central bank decisions include the Swiss National Bank, Bank of England, and the European Central Bank. There are no rate hike expectations predicted today but a surprise 15bps could come from the BoE so the pound could be more volatile today.

The GBPUSD is pushing into overhead resistance from the daily 20 EMA and could also test the internal trend line that connects the previous swing lows. The possible surprise rate hike appears to be being priced in and with 72% of retail traders on the ActivTrader platform also bullish, I am expecting a reversal lower should the Bank of England hold rates steady for another meeting. The main reason they will cite is the unknown around the exponentially increasing Omicron cases and possible economic slowdown.

Following the announcement of tighter monetary policy from the Fed last night, the DXY dropped back into the trading range it had attempted to break away from a day earlier. The result is currently a double top which will be a target in the coming weeks.

The EURUSD is also showing the same pattern as the DXY just in reverse. A more Hawkish ECB would see the euro rise today but the chances of that are slim. The key question to be answered today is what happens when PEPP finishes and how the APP is adjusted. Less accommodation in the aggregate would be a signal of the ECB tightening policy which may support a higher euro.

If the currencies are going to be mixed due to the central bank’s speak, an easier trade may be in the precious metals. There is a case being made for the price of gold to now rise as the money markets begin to signal tighter monetary policy and a fall in yields. The weaker US dollar would be a good catalyst today for a breakout of the recent consolidation period and yesterday’s FOMC spike lower may have been engineered to once again, shake the weak hands out of their positions.

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