Caution Prevails as Investors Eye Omicron and Fed Meeting

The dollar held its ground despite US Treasury yields slipping in the previous session, while gold prices remained range bound, waiting for a fresh directional catalyst.

European equity futures are mixed this morning with investors clearly on edge ahead of a week dominated by central bank decisions and key economic reports. Any decisions made on monetary policies will set the tone for the rest of 2021 while heavily impacting risk markets.

With the Bank of England, Bank of Japan, European Central Bank, and Swiss National Bank all expected to keep monetary policy unchanged, all eyes will be on the FOMC meeting on Wednesday. Expectations remain elevated over the Fed announcing a faster pace of tapering in the face of rising inflation and using more hawkish language than has been seen in previous statements. If this does become reality, it could weigh on stock markets while boosting the dollar.

Investors eye Fed decision

The Federal Reserve’s December policy meeting remains the main event for markets this week. With US inflation surging to its highest level in nearly 40 years, equity markets still volatile and the Omicron variant fueling economic uncertainty, it will be interesting to see what policymakers at the Fed have to say.

Back in November, the FOMC made an official announcement on tapering. Fast-forward to today and the central bank is set to announce an acceleration of tapering from January 2022, with consensus expecting the pace to double in speed, in order to counter inflation. This has boosted expectations over the Fed hiking interest rates sooner than expected with traders currently pricing in a 73% probability of at least one rate hike by early May 2022 and fully pricing a 25-basis point hike by mid-June 2022.

Much attention will be directed towards the Fed’s new dot plot and updated economic forecasts. Back in September, policymakers were forecasting one rate hike in 2022, followed by three in 2023 and another three in 2024. The new dot plot is expected to show the majority of Fed members now expect two rate hikes in 2022.

Currency spotlight – AUDUSD

The Australian dollar stumbled into Tuesday’s session under pressure as virus cases surged in the country’s most populous state. Daily Covid-19 infections jumped to their highest level in more than two months, fueling concerns over the economic outlook. However, there was some good news as reports showed that business confidence remained well above its long-term average, despite dropping sharply to 12 in November from a downwardly revised 20 in October.

Taking a look at the technical picture, the AUDUSD remains under pressure on the daily charts. Sustained weakness below 0.7180 could encourage a decline towards 0.7080 and 0.7000, respectively.

Commodity spotlight – Gold

Gold could enter the holiday season with a bang due to key central bank meetings, economic data and developments revolving around the Omicron variant. Prices have been trapped within a range over the past few weeks with bulls and bears waiting for a fresh directional catalyst.

This may come in the form of the Federal Reserve meeting or other economic events that could impact risk sentiment. Should the Fed step up the gear on tapering, this is likely to punish gold prices as the dollar appreciates, yields rise and rate hike expectations jump. In the meantime, support can be found at $1765 and resistance around the psychological $1800 level.

By Lukman Otunuga Senior Research Analyst

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