The U.S. Federal Reserve gets ready for the final monetary policy meeting of the year, and just like last year there is a high probability of a rate hike announcement. The U.S. Federal Reserve will publish the Federal Open Market Committee (FOMC) statement on Wednesday, Dec. 14 at 2:00 pm EST. Fed Chair Janet Yellen will then host a press conference where she will read a prepared statement and open the floor for questions from the financial press at 2:30 pm EST.
The Fed is expected to raise the benchmark funds rate by 25 basis points. The eyes of the market will be focused on the economic projections from the central bank to get some insights on next year’s policy moves.
The Bank of England (BoE) will release the Monetary Policy Summary on Thursday, Dec. 15 at 7:00 am EST. The central bank is expected to keep rates on hold with the majority if not all the votes in favor of keeping rates on hold. There is no press conference scheduled following the publication of the statement but the BoE releases the minutes of the meeting immediately after to offer transparency to markets.
The Euro/U.S. dollar (EUR/USD) currency pair tumbled 1.232% in the last week. The single currency is trading at 1.0541 after the European Central Bank (ECB) surprised markets with a reduction in the quantitative easing program, while at the same time extending the deadline until the end of the year and allowing the purchase of bonds with yields below the deposit rate. ECB President Mario Draghi was careful to avoid any comparison of the central bank’s move to be confused with “tapering” as it is slowing down the pace of bond purchases. The euro depreciated after the announcement and press release and is looking to the Fed to announce a 25 basis point hike to its benchmark rate on Dec. 14.
The ECB will face a difficult 2017 as the anti-Union movement across Europe has grown and triggered a surge in political risk. Elections in the Netherlands, France, Germany and Italy will all have a direct impact on the task at hand for the central bank. The ECB has enjoyed the backing of the Union during the worst times of the crisis, but now the European experiment is under threat complicating how fast and conclusive it can respond.
The EUR/USD could be heading toward parity if both the Fed and the ECB continue on a divergent path. The Fed underperformed against its own forecast at the beginning of the year as it has yet to deliver a single rate hike. Post election rallies in the United States have the dollar gaining traction with the promise of higher inflation as a result of new infrastructure projects that could keep the American central bank raising interest rates to keep up.
The Fed will deliver its economic projections on Wednesday and this is where the market will look for guidance into next year. There was plenty of optimism this time last year as the Fed had no way to know of the multiple setback that lay waiting the global economy, this time around after the United States itself has opened a can of political risk going into 2017 and a politically charged environment it remains to be seen if they will be more cautious in their predictions. Banks have been forecasting as many as six rate hikes if the growth rate and inflation expectations are met, while at the lower end a more conservative two could also feature if there are cuts to growth forecasts.
