The Federal Reserve is scheduled to have a meeting today, and many are wondering if Jerome Powell will announce any change in the bond purchase program. Such a scenario is very unlikely, but it would not be a surprise if market participants are already altering their strategies in anticipation of it.
In any case, Powell will surely be cautious when delivering his statements today. In fact, he might not even give any hints that he is going to wind up or cut the Fed's asset purchase programs, even if economic outlook has already improved, thanks to the expected massive stimulus from the new administration.
A recent poll revealed that many economists have a wide divergence of views regarding this issue. In particular, majority believes that the Fed will begin easing the program in the first three months of next year, while over a quarter expects that it would be phased out in the last three months of 2021. Meanwhile, about 25% projects that it will happen on or beyond the second quarter of 2022.
At the same time, more serious inflationary pressures are expected. Inflation itself is projected to begin rising to 2.0%, which generally coincides with the expectations of economists.
Going back to the asset purchase program, to date, the Fed buys bonds worth $ 120 billion a month. $ 80 billion of this is in Treasury securities, while the other $ 40 billion is in mortgage-backed debts.
Why are investors so nervous about the curtailment of this program? On the one hand, such will clearly affect the yield on long-term treasury securities, while on the other hand, it will clearly cool the frenzied securities market, which constantly renews its yearly highs at every statement given by Joe Biden on additional fiscal stimulus.
In that regard, dollar is expected to decrease in price as compared to other currencies in the market. However, demand for risky assets are also very few at the moment, especially in light of disruptions in the supply of vaccines, as well as with the weak economic data from the Euro area. Bullish trend will resume in risky assets only after a successful break above 1.2190, as such will accordingly bring the quote towards 1.2230 and 1.2280. But if the price returns to 1.2140, EUR / USD may drop to 1.2110, and then to 1.2055.
In another note, yesterday, the International Monetary Fund (IMF) revised its forecasts on global economic recovery, changing it to 5.5%, which is a bit better than the earlier projections. According to the ISM, the global economy will grow at a faster pace this year, but for this to actualize, governments need to continue stimulating and supporting their economies, at least until the COVID-19 pandemic retreats.
Then, in 2022, global economic growth is projected at 4.2%. The revision of forecasts took place due to the stronger dynamics of economic growth in the second half of 2020. In terms of problems, there is still huge uncertainty about the rate of infection with the coronavirus and the effectiveness of the vaccine against it. The pace of economic recovery directly depends on the success of vaccinating the population of various countries, at the same time, slower vaccination can lead to new viral mutations, as was the case with the strain identified in the UK.
Economic growth of the US is also revised to 5.1%, while the forecast for the EU economy has been lowered to 4.2% due to the ongoing lockdowns. Projections for the UK economy were also lowered, from 5.9% to 4.5%, due to a similar problem.
With regards to other statistics, the Conference Board published a report yesterday revealing that consumer confidence in the US has risen to 89.3 points this January, which is better than the expected fall to 88.5 points. The growth occurred amidst an increase in the index of expectations, which came out at 92.5 points against 87.0 points in December.
The outlook for the labor market has also improved, which suggests that consumers are expecting more jobs in the coming months. As a result, the index jumped from 28.0% to 31.3%, while the number of those expecting job cuts fell from 22.2% to 21.4%.
The University of Michigan is to release revised consumer sentiment data (for January) this Friday. Economists expect that the index will not change from the preliminary value and will be 79.2 points, against 80.7 points in December.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
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