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Will the FOMC end its QE programme early today?

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26 January 2022

Written by
Matthew Ryan

Head of Market Strategy at Ebury Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

The main focal point of the week in the currency market is almost upon us, with the Federal Reserve set to announce its latest policy decision later today.

O
ne of the main talking points in financial markets in recent weeks has surrounded the possible pace and timing of policy normalisation from the Fed. The FOMC itself has adopted a far more hawkish stance in recent weeks. At the bank’s December meeting, policymakers acknowledged that the recent spike in US inflation was no longer seen as ‘transitory’, with the dot plot’ suggesting that the Fed is now on course to raise rates on at least three occasions in 2022. The committee also indicated that net asset purchases will be wound down to zero faster than previously anticipated. QE tapering was accelerated from $15 billion a month to $30 billion, ensuring that the programme will be finished by March at the latest.

There has, however, been growing speculation that an even earlier end to QE could be on the cards, and that the FOMC may announce this at its meeting later today. Given the extent of the inflation overshoot, we see either an immediate or February end to QE as entirely possible. This would be a real signal of intent from the Fed and would, in our view, both support the dollar and ramp up bets in favour of a 50 basis point hike at the bank’s March meeting. Any comments on a balance sheet reduction later this year, known as quantitative tightening (QT), will also be closely watched by investors. We expect the Fed to continue laying groundwork for QT this week, although a formal announcement is still likely a number of months away.

Prior to today’s Fed announcement, the dollar was broadly stronger versus its major peers on Tuesday, notably against the euro. The common currency slipped to its weakest position so far this year during London trading, amid a combination of geopolitical concerns and hawkish Fed bets. The US has reportedly placed 6,500 troops on standby to deploy in Europe should the ongoing crisis escalate, to which Russia is set to be watching with great concern. Investors don’t quite know what to think about the ongoing tensions, but the uncertainty is fuelling a traditional risk off response, whereby the low risk safe-havens, including the dollar, rally at the expense of almost everything else. While Russia has repeatedly denied it is set to invade Ukraine, it has also said that it would take military action unless its demands are met. Whether the situation will resolve itself any time soon appears to be anyone’s guess, so the impact on FX at present is rather unclear.

In the build-up to today’s Fed meeting (7pm GMT), investors will have this afternoon’s Bank of Canada announcement to chew on (3pm GMT). Economists are erring towards no change in rates, although we wouldn’t be surprised to see an preemptive hike.

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