The Fed And Earnings On Tap

The euro recovered yesterday after recording a four-day low just below $1.2110. The bounce faded near $1.2175, as the euro put in a lower high for the second consecutive session.  It stopped shy of its 20-day moving average (~$1.2180) and has not been above it for almost three weeks.  A break of the $1.21 could signal a test on the year's low near $1.2050.  Ahead of the FOMC conclusion, where Chair Powell is expected to bat away attempts to bait him into the tapering "debate", we suspect the euro can rise back toward the $1.2150 area (FXE).  Sterling posted an outside up-day, like the Aussie, and follow-through buying lifted it to a new high (~$1.3760) and its best level since May 2018. It appears to be consolidating above $1.3720, and the range is particularly narrow (less than 40 pips).  That said, the high of the day may not be in place (FXB).


The FOMC meeting concludes today, and expectations are running low for any new policy announcements.  Recall that last month, the Fed refined its forward guidance to say that the asset purchases will continue until substantial progress toward the policy goals. Other than that, the statement was nearly identical to the one that followed the November meeting.  The economy is evolving broadly in line with Fed expectations, and the rollout of the vaccine supports a more optimistic medium-term view.  Similarly, the $900 bln stimulus bill is clearly what Fed officials had in mind when they advocated fiscal support.  Powell is unlikely to be sucked into a detailed comment on President Bident's fiscal proposal.  

More important will be how the fiscal stimulus impacts the Fed's view of the economy, and that may not be known until the updated forecasts in March.  However, we do note that based on the stimulus already approved in large part, the IMF revised up US growth this year to 5.1% from 3.1%.  It also suggested that the $1.9 trillion-proposal would lift the economy another 1.25% points this year and five percentage points over the next three years.  The issue of the fiscal stimulus directly impacts "substantial progress" criteria.  Powell may point to high levels of near-term uncertainty but has consistently recognized the dependence on the virus's course and progress to combat it.  With new mutations and the seemingly slow rollout, Powell is unlikely to get caught up in defining "substantial progress."    

Ahead of the outcome of the FOMC meeting, the US reports December durable goods orders.  Economists expect the orders to be mainly in line with November's 1% headline gain.  Excluding aircraft and defense orders, a 0.5% increase is expected, matching the previous month's rise.  It is unlikely to elicit a strong market response, not just due to the proximity of the FOMC, but tomorrow's first look at Q4 GDP.  A little better than 4% annualized growth is expected, down, of course, from the incredible 33.4% expansion in Q3 (after the implosion in Q2).  

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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