Daily FX: Now Is The Time To Talk Tapering

Confirmation from the Federal Reserve's James Bullard on Friday that Chair Jerome Powell has formally opened the tapering debate has extended the flattening in bond markets and is a clear dollar positive. Look out for a whole host of Fed speakers this week, warning that this dollar rally has further to run.

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USD: FOMC speakers dominate this week's agenda

The fallout from last week's hawkish FOMC meeting is still reverberating around markets and received a nudge on Friday from the Fed's Bullard, who said Chair Powell had now formally opened up the discussion on tapering. This is a far cry from the April FOMC press conference, where Chair Powell calmed markets with a clean view that 'now is not the time to talk tapering'.

The hawkish turn from the Fed has many wondering whether its new strategy of 'Average Inflation Targeting' adopted last September was really just some elaborate form of forward guidance that would be dropped at the first sign of genuine concern over inflation. Bond markets seem to be reading it this way, with US Treasury yields rising at the short end of the curve on the view of early tightening, while long-dated yields are falling sharply - probably on the view that: a) the Fed may not be prepared to run the economy hot after all and b) early tightening could mean a lower terminal rate for Fed Funds after all. Currently, the market looks to be pricing the first Fed 25bp hike around November 2022.

Conventional Fed tightening, as we highlighted in our Fed review on Wednesday, looks to be a dollar positive against the developed market low-yielders, particularly those currencies in Europe and Japan which have not enjoyed the terms of trade gains of the commodity exporters (UUP).

As we discuss in the G10 Week Ahead, we think Fed communication will dominate markets this week. Today we should hear from the Fed's Bullard and Robert Kaplan at 15:45 CET discussing the US economic outlook at an OMFIF event. Bullard on Friday said his 2022 dot was for a hike. 

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Disclaimer: This publication has been prepared by the Economic and Financial Analysis Division of ING Bank N.V. (“ING”) solely for information purposes without regard to any ...

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