US Fed and ECB meetings will decide how the rupee acts and RBI reacts

Markets are in a pause mode, waiting for the storm to hit once again. Approaching year end, liquidity tends to dry up as market participation by traders drops. Because of this fall in trading volumes, there could be more than usual volatility if any of the scheduled events affect prices in a negative way.

Talking about Federal Open Market Committee (FOMC) meeting scheduled for later today, policymakers’ updated projections for the US economy and interest rates will be the main focus to assess whether they think the rate cuts so far are enough to keep the economy rolling for another year.

This is the last FOMC meeting of the year and there are no chances of a change in policy. However, there is always the possibility of market-moving comments from US Federal Reserve Chairman Jerome Powell.

At their last policy meeting in October, the US Fed cut interest rates for the third time in a row and instead of emphasising the need for such aggressive measures, Powell described the reduction as a move to insure against softening global growth and uncertain trade developments.

While these two problems persist, the US economy has taken a turn for the better on improved consumer spending, more jobs created, inflation ticked higher with the manufacturing and service-sector ISMs increased.

Therefore, Jerome Powell has very little reason to focus on the risks and vulnerabilities of the US economy.

Instead, he will most likely reiterate that policy is in a good place because of the strong labour market and consumption.

For the euro, Christine Lagarde will be overseeing her first monetary policy announcement as European Central Bank (ECB) president and might opt to maintain status quo. The ECB believes that policy needs to remain accommodative and governments need to do their part to boost the economy.

The economy is just beginning to take a turn for the better so the ECB will see if the recovery continues before shifting the central bank’s course dramatically. The pair shall trade relatively stable respecting the support at 1.1030 and resistance at 1.1125 levels.

UK election will be the first major known but unknown event. The nature of the event is known but the outcome remains a surprise, though the polls are building up the expectation that UK PM Boris Johnson is up with a large majority. Markets have already discounted Conservative party’s win which boosted GBP/USD from 1.2800 to 1.3190. If the results are confirmed, the upside will be limited to 20-25 basis points. Anything contrary that expected, ie. victory of Labour party will give a sharp fall to the pair. Presently, the pair holds a strong support at 1.3015 which if broken the pair can plunge towards 1.2700 in a couple of days.

Another known-unknown is the natural deadline for tariffs from the US on Chinese goods on December 15. There is still no clarity whether the US will impose tariffs on nearly $160 billion of Chinese consumer goods, but the way the tariffs are written, the Trump administration has to act or else they automatically take effect. Market expectations are that the tariffs shall be delayed and possibly even reduce existing ones. This news next week can have repercussions on the already fragile sentiments.

However, the Indian rupee remained relatively unaffected by the global mishap and is cushioned well on the back of persistent selling by foreign banks and likely inflows ahead of ArcelorMittal’s payment to acquire Essar Steel.

In the last couple of months, the Reserve Bank of India (RBI) has come forward and protected the rupee from appreciating sharply near 70.30-50 levels. It has bought about $30 billion since June 2019, out of which, a major chunk of about $18 billion was bought after September 2019. If the rupee breaks 70.80 levels, there is a higher probability that the RBI will intervene and protect the pair near 70.50 levels. Hence, the RBI is the king who is ruling the rupee and its reins are in the latter’s hand.

Amit Pabari is managing director, CR Forex Advisors.