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All Eyes On Fed.... - Capital Street FX

03:44 IST


December of this year was never going to be a quiet affair. Central banks shackled market volatility for years and when it was time to let go; it was bound to give way to a more uncertain trading environment. The European Central Bank (ECB) was the first monetary policy divergence event scheduled on the last month of the year. The communication of the central banks intentions via the comments from President Mario Draghi turned out to be poor. The market was expecting a strong show of force and full commitment to quantitative easing. A bold request? Maybe, but Mr. Draghi had used similar language to that used during the Greek Crisis. Strong words built anticipation for strong actions. The ECB did not follow through failing to significantly add to its amount of bond purchases and it later blamed the market on misunderstanding when it did enough, but the reality is that it did not fully commit.

The U.S. Federal Reserve has teased the arrival of higher interest rates for almost two years. The end of quantitative easing that came with a slow tapering process was reached at the end of 2014 and for a whole year every FOMC the market has weighed the probability of a rate hike. The Fed shifted from the transparency of forward guidance towards the uncertainty of data dependency. The June and September meetings were heavy favoured candidates but now after a sentence in the October statement the market is awaiting the announcement and the rate to be < 0.50 percent. The Fed will release its FOMC statement on Wednesday, December 16 at 2:00 pm EST. A press conference with Chair Janet Yellen will follow at 2:30 pm EST.

The knowledge that the Fed was going to hike rates has already been priced in given the long preamble, investors are warned about volatile price action following the announcement, specially given the situation after the ECB meeting has further sparked uncertainty on market reactions on heavily anticipated events.

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