Fed Preview: The dollar has room to rise on upbeat projections and the lack of stimulus

The Federal Reserve is set to leave its interest rate unchanged in the last meeting of 2020 while new forecasts will likely be more upbeat, signaling no urgency for further support. Markets may be disappointed and drop while the dollar could rise, Yohay Elam, an Analyst at FXStreet, reports.

See:

• Fed Cheat Sheet: EUR/USD to test 1.2275 in the base case scenario – TDS

• Federal Reserve Preview: Forecast from 11 major banks

Key quotes

“If the Federal Reserve only pays tribute to the hardship but focuses on the upbeat recovery and vaccine hopes, markets may drop – despite the fact that officials hinted that the Fed is unlikely to act. The writing is on the wall, but there seems to be an unwillingness to read it. In this scenario, the safe-haven US dollar has room to rise while stocks retreat.” 

“In case the Fed surprises by hinting that additional stimulus will likely come in the next meeting – just after President-elect Joe Biden’s inauguration – markets would likely surge and the dollar would resume its decline. This second scenario has a lower probability.” 

“If the bank sees the glass half-empty and shocks with additional QE, a Christmas party would erupt in equities and the greenback would free-fall – yet the chances are low.”