GBP/USD: Taper Tantrum? Powell May Push Sterling Off The Cliff

GDP will likely overshadow weekly jobless claims, but Friday’s Core Personal Consumption Expenditure (Core PCE) is of interest, as it is the Fed’s preferred measure of inflation. Any increase toward the bank’s 2% could move markets. Personal Spending and Personal Income will also be eyed.

Fed Preview

The main event of the week is the Federal Reserve’s rate decision on Wednesday. The world’s most powerful central bank is set to leave its policy unchanged but could signal an upcoming shift. Some market participants speculate that the Fed would hint that it will lay out a plan for tapering down its bond buys in June when it releases new forecasts. That could boost the dollar.

Federal Reserve Vice-Chair Richard Clarida said that any such move would come at a meeting including fresh projections. Chair Jerome Powell vowed to communicate any tapering in an orderly and timely fashion. Will April’s meeting be the time to send such a signal?

If the bank refrains from indicating its next move, investors, focus on the bank’s messages on its two mandates – employment and inflation. On the labor front, Powell will likely insist that 8.4 million Americans are still out of work, thus necessitating more monetary support. But how will he react to the sharp drop in jobless claims? Optimism on employment could boost the dollar.

A similar dilemma faces the Fed when it comes to inflation. According to the recent publication, the Consumer Price Index remains tame, supporting the bank’s stance that any upside bump is only “transitory.” However, the global chip shortage could last for an extended period, and Procter &Gamble’s decision to hike prices both pose questions about creeping inflation. Any shift from the current dismissal of price rises could send the dollar surging.

All in all, acknowledging the improving outlook and hints of action could boost the dollar while sticking to considerably accommodative policy would weigh on the greenback.

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