FOMC Decision – This Week’s Most Important Event Risk

Preceding the all important FOMC decision this week, the overall US Dollar Index (I.USDX) continued suffering from the uncertainty over the Federal Reserve’s tapering plan. However, stronger US retail sales data and US budget deal, designed to avoid a government shut-down next month, helped US Dollar to pull-back from lows. Nevertheless, with divergent performance against other major currencies, the overall US Dollar Index registered a marginal loss in the week gone by.

This week’s economic data is likely to be overshadowed by the Federal Reserve’s last meeting of the year on Dec. 17-18. All eyes will be on Wednesday’s FOMC decision on whether to start tapering or not. Equally important will be the Fed Chairman Ben Bernanke’s press conference, also scheduled on Wednesday following the announcement of the decision, which will be closely watched and is likely to be the most critical driver for global financial markets this week.

Recent upbeat US economic data, including the latest strong labor market data, suggest strengthening of the US economic recovery. This coupled with a budget deal has brightened the prospects of the Fed trimming the size of its massive stimulus of $85 billion monthly bond-purchase program, popularly known as quantitative easing or QE3.

Although many market participants still expect continuation of the Fed’s stimulus program through early 2014; however, any decision to taper, even by a modest amount, is likely to have a long-term positive impact for the US Dollar and could possibly infuse heavy volatility into the Forex market.

Also read:  Technical overview for major currency pairs

Besides the tapering decision, the Fed will also release its economic projection report, which includes its projections for economic growth and inflation over the next 2 years. The report also includes a breakdown of individual FOMC member’s interest rate forecasts.

In addition to the FOMC decision, investors will also focus on some key economic indicators to judge the health of the US housing and manufacturing sectors from the upcoming week’s US economic calendar.

Important manufacturing reports scheduled for release this week from the US include the Empire State Manufacturing Index, industrial production report on Monday and the Philly Fed Manufacturing Index, on Thursday. Consumer inflation data, CPI and Core CPI, is scheduled for release on Tuesday. This week’s key housing data for the month of November include the release of building permits and housing starts on Wednesday and existing home sales data on Thursday. Final GDP data on Friday concludes this week’s important US economic releases.

Although, US central bank is likely to take the centre stage this week, some important economic releases from other parts of the global will also be watched by the market.

The BoE has already said that it is unlikely to raise interest rate before the unemployment rate falls below 7% threshold, subject to forecasts for annual consumer price inflation remains around the 2% target in the next 18 to 24 months. Hence, market participants will keep a close watch on this week’s UK inflation report on Tuesday and labor markets reports along with the minutes of the BoE’s latest policy meeting on Wednesday, to evaluate the possibilities of any rate hike by BoE. Any hints of a rate hike, as soon as 2015 or earlier than that, coupled with a better employment report and slowing inflation is likely to significantly boost GBP. Other key UK economic releases include retail sales data for the month of November and third-quarter final GDP data, scheduled for release on Thursday and Friday respectively.

Also on Thursday, BoJ is scheduled to announce its monetary policy decision, which will be followed by a press conference and will be closely scrutinized to see if the central bank shows willingness to further expand its economic stimulus measures.

Key releases from this week’s Euro-zone features the German ZEW Economic Sentiment, scheduled on Tuesday, and German Ifo Business Climate, scheduled on Wednesday.

Since majority of the market participants will be focusing on the FOMC decision over its monetary stimulus, investors are likely to confront a week of additionally high volatility in the markets. Moreover, investors are likely to reduce risk by lightening their positions, suggesting a range-bound trade before the very important announcement. A decision to taper could have a knee-jerk market reaction, with an additional scope of broad US Dollar rally in the near-term.

Original Article: Admiral Markets