Fed Taper a Foregone Conclusion, Focus Instead on Taper Pace

It’s FOMC decision day and a taper announcement seems a forgone conclusion. The question among investors is rather when the FOMC will complete its asset purchases (speed of tapering) and when they will start to raise interest rates.

Most economists expect the Federal Reserve to reduce bond purchases by $15 billion every month and complete the taper by mid-2022 (eight months).

As Fed policy makers have said that they want to end the taper before moving to possible rate hikes, most attention will be paid to the taper pace. In case of a quicker end to the tapering, the U.S. dollar will rise.

The focus will also be on the Fed’s language regarding inflation. If the committee retains the language that elevated inflation is “largely reflecting transitory factors”, the dollar will weaken. If today’s FOMC statement is however more hawkish, stating that inflation is lasting longer than expected, the dollar will strengthen as the market speculates on earlier rate hikes.

Speaking of rate hikes and even though the market speculates on a faster rate hike path, diverging from the forecast of Fed policy makers, economists expect the Fed to suggest a liftoff when the unemployment rate falls to 4 percent.

Traders prepare for heightened volatility around the time of the FOMC statement today at 18:00 UTC.

EUR/USD technical view: If the euro falls again below 1.1540, chances of a bearish 1.15-breakout increase with lower targets seen at 1.1480 ad 1.1450. On the upside, price breaks above 1.1640 and 1.1670 will spur bullish momentum towards 1.1720.

GBP/USD technical view: Below 1.3580 we will turn our focus to lower targets at 1.3550 and 1.3450. On the upside, the 1.3750-area could serve as a resistance whereas a break above 1.3780 could attract more buyers towards a higher a target at 1.3820. However, larger fluctuations will be expected tomorrow, which is why the cable could be reluctant to big price movements today.