Today the FED rate hike is imminent. Also, it will be Chair Yellen last move before she hands over to Powell in February. Last rate hike of the year is already priced in by the market for a chance of 95%. The Focus will be on guidance of the future policy. Even though, Yellen won’t be running the show but Powell, who is already FED Board Member. He’s views will be closely monitored.
Two scenarios are most likely for today’s decision:
Scenario 1: Interest Rate
No change in guidance from September.
This means; the outlook for next year will be the same with 2 to 3 rate hikes starting in June. With no change: in Inflation and growth forecasts.
This scenario will affect the dollar and the EURO might revisit the 1.18 level.
The USDJPY will be hit hard and the Gold will trade on the upper range of the last week levels.
Scenario 2: Interest Rate Hike.
New guidance, with Interest Rate Hike might start in March.
In this outlook, Yellen will highlight on the better economic data while not focusing on the slowing manufacturing and services PMI data. Also will signal that the FED; might increase rate earlier than it was forecasted previously.
This Scenario will extremely support the dollar. The EURO will fall to 1.15 level.
The USD/JPY will target the 115.00 and the Gold might fall to the 1220 range.
Our outlook is for a minimal change in the FED outlook, with Yellen leaving a room for Powell to maneuver in February, yet she will be optimistic. This will support the dollar but the reaction would be limited.
The market will turn its focus to the tax bill discussion, and tomorrow’s ECB and BOE meetings.
Volatility is expected, further spread widening before and during the release of the news and the press conference might occur; be cautious.