The markets have been on edge recently, fueled by renewed Covid-19 concerns despite the overall positive and optimistic trading environment as evident by higher stock prices and improving inflation outlooks. Price action across most asset classes has been approaching a critical point with stocks at all-time highs and the Dollar at a major pivot point which could decide what happens next.
Enter the Fed. The members will be meeting over two days as usual and will announce their latest rate decision on Wednesday alongside the FOMC statement and the press conference which includes a Q&A session.
The Fed is expected to prepare investors of a potential tapering of the central bank’s asset purchase program. This does not mean it will start now but the central bank itself could be readying the framework and the announcement soon, a move that could highlight the divergence in the US monetary policy and slowly build towards higher interest rates in the coming 2 years.
Nonetheless, an increase in Covid-19 cases and potential inflation concerns could still spark some unexpected outcomes during the Fed’s statement. Regardless what the Fed could have in mind, the markets may find new direction and new momentum.
The Euro against the Dollar is trading around 1.1700s (Figure 1), down from the 1.2200s about 2 months ago. At the same time, the British Pound dipped into the 1.3600s after hitting recent highs around 1.4200s. This was also the case for the Australian Dollar which traded close to the important 0.8000 level before reversing lower and trading around 0.7300s. All of this highlights the market’s recent extent where the Dollar is finding resistance after recent gains. From here, a hawkish Fed could see the Dollar breaking higher and pushing against other currencies while a more dovish Fed could see the opposite taking place.
*Figure 1 (Daily EUR/USD Chart)
Moving on to stocks, better than expected earnings and an improving corporate environment led to higher prices and all-time highs on the major indices. According to analysts, this could continue regardless of what the Fed does. On the other hand, Cryptocurrencies exploded higher after holding important support levels for a while. Bitcoin is a notable one where the most popular cryptocurrency held around $30,000 before moving towards the $40,000 and maintaining current gains.
When major news is expected, it’s important for traders to be cautious and either exit some or all of their positions or maintain stop loss positions to protect against adverse market conditions.
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