The countdown of the main event in this season has begun as the Federal Reserve (Fed) starts its Federal Open Market Committee (FOMC) on Tuesday and will announce its tapering decision on Wednesday. Investors are waiting for the Fed to turn the page of savage mega stimulus measures to prompt inflationary growth and return towards normalising monetary policy.
It is worth noting that the start of the tapering of a massive amount of $120 billion a month on the Treasuries and mortgage bond buying program under the current circumstances may not necessarily lead to a significant drop in the stock market in the United States.
We may recall that in November and December, 2018 the S&P 500 broad market index collapsed by 20%. The Fed started to raise interest rates from 0.25% in December 2015, and investors were not troubled by this set of rate hikes in any way until the monetary regulator announced in early 2018 that it would hike interest rates every two months. This moved the interest rates from 1.5% to 2.5% by December 2018 and this triggered the collapse of the S&P 500 index.
Now we have the tapering instead of interest rates hikes, but the logic remains the same. What is important is not the tapering itself, but the speed of this process. If the Fed announced that tapering will begin with $15-20 million per month with dovish comments that the speed of tapering is not carved in stone and is not related to the interest rates hikes, than the market may accept it as a positive signal for a rise in rates over the next coming months.
Stock indexes may perform a correction just after the announcement of tapering with the S&P 500 index declining to the support at 4530-4540 points. If the index remains above this level, together with the strong desire of traders to get rid of Treasuries while the Fed is still buying them, we may expect a strong Santa rally. If the index rises above 4620 points it may go even further up to 4700 points.
We may see quite a different story if the Fed announces the tapering of $30-35 billion a month. Then it would be hard for stock markets as the S&P 500 index may plunge to 4495 points and may clear the path to a more significant correction. This scenario is not very expected, so it could be considered as an alternative and not the primary one to come true.
For other markets the FOMC meeting is also a milestone event of the week. However, crude has its own story too, as OPEC+ will have a meeting to decide on further oil output increases. No surprises are expected as investors await another rise of 400,000 barrels per day in oil production starting from December 1. So, formally crude prices may have a support from this side. A bitter pill for the market has been swallowed in the form of the request by U.S. President Joe Biden for an increase in oil production. This request comes just before the decision of OPEC+ on whether the group will moderate the increase of oil production. If this is the case, gasoline prices may rise even further. Even though this could be the case, the U.S. administration may take some actions regarding lowering oil price. So, we need to assess the next move by OPEC+ and how the Biden Administration will react. So far, OPEC members are mostly rejecting Biden’s call.
Gold prices may still climb to $1840 per troy ounce if the Fed does not announce faster than expected tapering amounts. Gold prices may test this ceiling, but it would be hard to expect any further rise. Fed’s tapering is a long story, and it would pressure gold prices starting this December to $1650 per ounce.
Forex is bracing for the FOMC meeting. EURUSD is going to keep its upward correction pattern to 1.16300 and 1.17500 confirming dovish intentions of the Fed. The pair is supported at 1.15400 and will not likely break through this level as long as the Fed is holding to the dovish tapering scenario. In case of the alternative scenario, the pair may plunge to the 1.1200-1.1300 by the end of next week.
GBPUSD has its own game as the Pound suddenly turned weaker with a descending trend. This week’s support for the Pound is at 1.35700. If the Bank of England (BoE) fails to support the Pound it may plunge towards more sensitive levels below 1.3500. British media led by the BBC are calling on the BoE to start an interest rate hike in order to tackle high inflation. If the BoE accepts their call the Pound may reverse to 1.38000-1.38500 against the Dollar, restoring its upward trend.