All Eyes on the US Fed meeting outcome

Investors around the world will be watching US markets this week. It is the busiest week of the fourth quarter earnings season; the US Fed has a monetary policy announcement. While the Dow Jones Industrial Average extended its slide for the third trading day, NASDAQ and the S&P 500 held onto their gains. This performance reflects the market’s belief that big tech earnings will be strong. If they’re right, this strength could carry over to the Dow and take currencies higher. For now, most of the major currencies pulled back on Monday with the exception of the New Zealand currency.

While FOMC and GDP numbers are important, analysts expect corporate earnings to have a bigger impact on currency and equity markets. Strong results fuels hope for a more robust late Q1, early Q2 recovery. The Fed is widely expected to leave interest rates unchanged but Jay Powell’s outlook for the economy and comments on tapering could affect asset movements.

He is expected to echo the optimistic outlook shared by his peers last week but in contrast to some Fed Presidents, he’s likely to be tight lipped on tapering because it is simply too early to call.  The Fed meeting should pose no risk to the equity market rally. GDP numbers may trigger selling. It is no secret that the fourth quarter was hard for the United States. Virus cases surged, the Capitol was attacked and retail sales fell every month between October and December 2020. GDP is expected to rise 4% compared to 33.4% in third quarter, but there could be a bigger downside surprise.

It could also be a challenging week for EUR, despite better than expected PMIs and ZEW. The business sentiment index dropped in December 2020. This decline was no surprise because the second virus wave halted the economy, but a similar deterioration in the expectations component is more concerning.

Everyone from investors to central bankers sees stronger growth in 6 months time but German businesses remain pessimistic. On Thursday we’ll get to see if that sentiment is shared by Eurozone consumers and businesses. On Friday, Germany releases its fourth quarter GDP report and we should see the first of two negative quarters that make a double dip recession. GDP growth is expected to fall and unless there is a strong snapback in February or March, growth will remain negative in the first quarter.

With the exception of the Swiss Franc which followed EUR lower, the other major currencies were unchanged. GBP bounced off its lows but the country’s lockdown could lead to a weaker labor market report on Tuesday. We expect to see a sharp rise in jobless claims and slowdown in wage growth.

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