If the Fed meets all market expectations regarding accelerated tapering and rate hikes, the US dollar is likely to appreciate even more.
The US dollar index (DXY) continues to circulate at around 96.25 in trading earlier this week (13/December), still tends to be sideways in the range that has been formed since late November. The market is relatively quiet ahead of meetings and announcements from a number of major central banks over the next few days.
Concerns about the spread of the Omicron variant of COVID-19 may be put to rest this week, as six out of ten G10 central banks have scheduled their respective regular policy meetings and announcements. Several central banks of developing countries will also hold similar meetings, including Bank Indonesia.
The FOMC meeting became the most attention-grabbing event. Market participants expect the Fed to announce an acceleration of its tapering program, as well as updating the dot plot scheme depicting forecasts for faster rate hikes over the next few years.
The money market is now fully pricing in a 0.25 percent increase in the Fed's interest rate in May 2022. The US dollar has the opportunity to appreciate even more if the Fed meets all market expectations, especially for currencies whose central bank will not change interest rates in the near future.
"The Fed meeting could certainly prove to be a catalyst for EUR/USD to break below 1.10," ING analysts said in a note. ING also expects USD/JPY to rise to 115.00 after the Fed's announcement.
In addition, the ECB and the BoJ will hold a policy meeting this week. The BoJ is unlikely to consider policy tightening during Haruhiko Kuroda's tenure. While the results of a Reuters survey showed that analysts predict the ECB will cut the scale of its monthly bond purchases starting April 2022, but will not raise interest rates for years to come.
Three other G10 banks that will hold important meetings are the central banks of Norway (Norges Bank), Switzerland (SNB), and the United Kingdom (BoE). All three are likely to make statements expressing their intention to wait for more information on the economic impact of Omicron's emergence before raising interest rates.
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