Home > Market update ahead of key Fed, BoE and ECB policy decisions

Market update ahead of key Fed, BoE and ECB policy decisions

  • The US Federal Reserve, Bank of England, and European Central Bank are all scheduled to meet as investor attention flips from last week’s driving force of Covid-19 to monetary policies.

The US stock market closed higher on Friday, with the S&P 500 clocking its best weekly performance since February. Overall, the major indices rose about 4%. Meanwhile, despite ending the week lower, European shares averaged 3.1% in gains for the week to post the best weekly returns since March.

For the week ahead, investor attention will not just be on the Omicron variant situation. Rather, the added focus will be on critical details surrounding monetary policies from three central banks- the US Federal Reserve, the Bank of England, and the European Central Bank.

Major central bank decisions this week

This week, the US Federal Reserve will hold its final monetary policy meeting for the year. The two-day meeting takes place on 14-15 December and ends with a statement from the Federal Open Market Committee (FOMC) members on 15 December.

The market expects the Fed will signal a faster bond taper and the potential for interest rates hikes by the second quarter of 2022.

In the UK, the main focus will be on the Bank of England’s interest rate decision on Thursday, 16 December. While investor sentiment for a hike earlier in the month was high, the BoE’s failure has dampened the outlook, and chances of the central bank hiking the rates are likely to be affected by the growing impact of the new variant.

The European Central Bank (ECB) will hold its meeting on Wednesday and Thursday. It is expected the ECB’s policy announcement will signal the eurozone central bank’s plans with the pandemic emergency purchase program (PEPP).

Dollar to benefit from Fed decision

While the US economy has shown strength, inflation pressures remain a challenge across the globe even as the central banks look to bring this into check.

The Fed is alive to the risks and is set to announce that the QE program will end in February. This then paves the way for earlier and swifter interest rate hikes, Omicron permitting, with the Fed dot plot set to point to a minimum of two moves in 2022,” Dutch multinational ING said in a note.

According to the banking giant, the dollar is likely to strengthen further against its low-yielding peers like the Japanese yen and the Euro. The banking services provider noted that the Fed’s meeting “could prove the catalyst for EUR/USD to break down to 1.10.”

However, it believes investors could hold on for insight from the European Central Bank before taking positions.

Key central bank policy decisions out of the US, UK, and the EU come at a time stocks have traditionally started their Santa Claus rally. It also follows last week’s US inflation data, shown to have risen at its highest rate in 39 years, with the 6.8% year-over-year spike in November the fastest it has been recorded since 1982. 

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