Fed is about to step into new "hawkish Era"

FX:EURUSD   Euro / U.S. Dollar

European stock markets and the euro stood still in anticipation of the results of ECB meeting, while in the fixed income market there is a slight rush and the price of bonds is moderately growing. The yield of US Treasuries also fell after a rise to a seven-month peak on speculation about a new Fed head, likely to be a candidate with a more aggressive policy than Yellen.

The ECB plans to announce a reduction in the asset purchase program at today's meeting and any deviation from the most likely scenario ( 30bn, 9 months) could potentially cause volatility in the markets, particularly affecting the European currency and German bonds. Draghi will probably choose the most cautious approach to the changes of emergency stimulus begun in 2014, as inflationary pressures remain weak and depend on external factors, such as oil prices and global growth in general. In September, prices rose by 1.5% and internal drivers of inflation still did not show themselves in the opinion of ECB officials.

Obviously, Draghi does not want to repeat the mistakes of his predecessor Jean-Claude Trichet, who before his departure in 2011 raised rates only so that Draghi again cut them back. The central banks of other European regions, in particular Sweden and Norway, kept rates at the same level and Riksbank said that until mid-2018, monetary policy will remain untouched.

The ECB will probably retain the option of reinvesting the income received from bonds that have reached maturity, which will be a stable feed on the supply side of debt market. The amount of debt purchases through this option can reach 15 billion euros in addition to the main program. Draghi probably also worries about the problem of appreciation of the euro against the background of recovery, therefore, as a deterrent in any changes, it may manifest itself today.

The European currency is also being pressured by the struggle for independence of Catalonia. Separatists are given 48 hours to decide whether they will surrender to the authorities or will fight further.

Who's next to take the helm of Fed?

The director of the National Economic Council Gary Cohn seems to have dropped out from the short list of candidates, said sources familiar with the situation. Speculation before the announcement of the new Fed chief on November 3 will tickle investors nerves and keep trading unrest in US currency.

Oil market

Oil prices sank after the release of the EIA report, which showed an increase in commercial crude oil reserves by 856K barrels last week, while gasoline inventories declined by 5.47M barrels. This shows the process of restoring the balance of supply and demand in the US gasoline market and indicates a gradual slowdown in the pace of refinery. Saudi Arabia continues to support the markets with hints of extending the oil pact until the end of 2018, but investors are in no hurry to price in his comments.

Arthur Idiatulin
This analysis is provided as general market commentary and does not constitute investment advice.