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Fed Preview plus BOE, ECB, BOJ...

Video Script

Hi everyone, it’s time for our antepenultimate week ahead of the year. Yes that’s right, there are three weeks left for trading in 2021 and event-wise, this is probably the biggest one. We have all four major western central banks deciding rates - and importantly - setting the stage for what they will do in 2022. It’s a big week in forex and financial markets so stay tuned!


It feels like investor fears about the Omicron variant are starting to pass. The hope among scientists at the moment is that the new virus variant causes milder infections, even if it is more infectious. That’s good news of course and the way I’d characterise the moves in markets last week would basically be ‘risk on’ in response. We have seen the less demand for the dollar as a haven and the euro made gains, while stock indices and the price of oil bounced back from the correction in late November.


We need to be mindful of any new information about Omicron but investor attention has already flipped back to central banks after the semi-surprise reserve-ratio cut from the People’s Bank of China. From an investing standpoint, China’s central bank possibly making a dovish shift will offset some of the risk created by likely hawkish shifts at western central banks this week.


Before I move on to discuss the news highlights this week - please remember to give this video a quick THUMBS UP for the youtube algorithm.  Thanks very much!


Right, let's move on to this week’s economic calendar highlights. As I alluded to in the intro, it's the central banks that will hoover up all the attention from traders this week.


The first and always the most important is the Federal Reserve, which not only decides monetary policy but updates its economic forecast on Wednesday. Consensus among analysts is that the new Fed forecasts will predict higher inflation and probably faster growth with a hint of caution about new coronavirus variants. If that’s the case, Danske Bank among others expect the pace of tapering to increase to $25 billion per month from $15 billion, meaning that QE will be done by April next year.


It’s now a month since Andrew Bailey’s Bank of England made a last-minute U-turn on hiking rates, instead preferring to keep them at a record low. A survey from Reuters has a majority of economists predicting UK interest rates will be raised between 0.1% and 0.25% this week. However, Goldman Sachs think ‘Omicron fears’ will delay UK interest rates lifting-off zero until February 2022.


Unusually, at almost the same time as the BOE -the press conferences might even overlap - the European Central Bank will set policy too. The ECB is sticking to the ‘transitory’ narrative about inflation that was publicly ‘retired’ by Fed Chair Powell recently. The relative dovishness puts downward pressure on EUR/USD.


Lastly there is the Bank of Japan, which by extending its yield-curve control program at the last meeting is the most dovish developed central bank. USD/JPY has been stumbling at yearly highs recently but the large bout of yen weakness in Q4 has a lot to do with the BOJ showing no sign of tightening policy when other central banks are.


Right thanks everyone, good luck trading this week and make sure to click on subscribe so you don’t miss the next episode of the week ahead.


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