FOMC announces interest rate

Fed to Increase Rates and End its 7-year Crisis?

Almost all financial institutions and central banks around the world are waiting for a very important economic event scheduled for the upcoming Wednesday,December 16th 2015. The Federal Open Market Committee (FOMC) will announce the interest rate. There has been a long buildup and many experts and financial institutions are expecting the fed to increase the interest rate from 0.25% to 0.5%.

If the Federal Reserve decides to increase the rates, then it will end their 7-year crisis stance and it may be considered as a signal of recovery in the coming quarters. However, there is an uncertainty of where rates will go from here. Many experts and analysts believe that the Fed will opt to take one step at a time and that they won’t rush to increase the rates by more than 0.15% or 0.25%.

What do Fed Fund Futures Suggest?

If we look at the Fed Fund futures, then they are aligned for a rate hike, with a probability of more than 75% for an increase by 25 basis points, from 0.25% to 0.50%.

US Fed Funds Rate graphic

Global Recovery and Fed

A situation may arise where the market participants start to worry a little. The main reason would be slow global recovery and the Fed tightening its policy. There was a report published recently, pointing towards the increase of inflows and outflows. It highlighted that equity funds saw $6.4 billion in outflows ahead the upcoming interest rate decision.

The S&P 500 is already under a lot of pressure ahead of the fed meeting. It has slipped more than 3% in the current month, and if selling pressure mounts further we may witness more weakness. However, it’s hard to say that the recent moves were a sign of a weaker U.S. currency.

How is the Greenback shaping up?

This past week, there was a downside reaction in the US Dollar, as the greenback retreated ahead of the Fed meeting.

Downside reaction in the US Dollar, as the greenback retreated ahead of the Fed meeting

The US Dollar index broke a major support trend line on the 4-hours chart, signaling that investors are nervous. The index also settled below the 100 and 200 simple moving average (4H), which is a move to encourage sellers. An important support is forming near 97.0, which must hold if the index has to recover during the upcoming week. On the upside, a major resistance is forming near 98.75-99.20, as the 100 and 200 MA (4H) may act as a hurdle and prevent the upside move.

Impact on EURUSD?

The Euro was benefited this past week with the drop in the US Dollar. The EURUSD pair gained around 1.2% and traded to its highest levels for December 2015. The EURUSD pair traded close to the 1.1040 levels, where it found offers. There was a sharp upside reaction this past week that placed the bears on back foot.

US Fed Funds Rate graphic

However, if we see the daily chart of EURUSD, then the pair is facing a monster resistance near 1.1040-60 levels. Both the 100 and 200 simple moving averages are placed around the stated area. This clearly means there is a massive barrier for EURUSD ahead, and if the fed opts to rise the interest rate, EURUSD may fall sharply.

How may GOLD react?

Most investors will be keeping an eye on the price of yellow metal. There was a major decline in the price during the past few weeks – GOLD fell and even formed a new yearly low. It is currently trading near $1070-80 levels, and it would be interesting to see how the price trades after the fed interest rate decision.

The daily chart of GOLD is pointing the fact that sellers are in control. A break below the $1060 support area may take the price towards the recent low of $1046. Any further declines may encourage sellers to take the price towards the all-important $1000 area, where buyers might take a stand.

US Fed Funds Rate graphic

To Sum it up

The Fed members will meet on Dec. 15-16 and decide on upcoming policies. If they opt to increase the interest rate, then a higher U.S. borrowing costs may result in more buyers for the US Dollar in the coming months.



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