Since the spike in bond markets in March we have been continually waiting for signs that reflation was going lead Federal Reserve Chair Jerome Powell announce changes to Fed policy.
That reflation risk has abated and the initial reaction in the bond market almost completely reverse.
The USD over this same period has been traded on the idea that the Fed will be moving policy sooner rather than later and has driven flow State side.
Yet that fundamental driver has quickly changed on August data and Fed speak that has certainly tried to quash any thought of taper and rate rises.
All this has raised more questions than answers and we are still no clearer as to when and how the Fed will move.
Which is why this week’s FOMC is the only event town for us FX traders.
First thing to remember; at Jackson Hole, Powell made clear the economy has not sufficiently recovered from the COVID crisis.
And, that there are still over 6 million fewer workers employed compared to pre-pandemic levels and the non-farm payrolls from August suggests that a fast recovery isn’t likely.
Then there is the issue of inflation, which has been significantly higher than the Fed target rate. Even last week’s ‘weaker than expected’ read, met with some positivity, of 5.3% is 330 basis points above target – that is hot whatever way you look at it.
The market has been attuned to talk, that this level of inflation is putting serious pressure on main street America. Wages are not keeping up with level of inflation and it is putting stress on their household bottom lines. This point is why some are suggesting the emergency measures from last year need to be slowed, and now not later.
So, the question for us in the FX trading space is: has the US reached the thresholds of ‘substantial further progress’ (this is the Fed definition statement) on inflation and employment?
This is what we are all waiting to see on Thursday. Few expect tapering to commence this week, but most now expect Powell and Co to give clarity and even a roadmap on how it will move policy over the coming year. It may even state a date like its other central bank peers have done for lift off. Most believe the November meeting is the one to see the first movement, but again we will have to wait and see if this is fact.
Thus, from a trading perspective, don’t expect any major movement to begin the week but as we approach the meeting positions will build on speculation the Fed will act one way or another. They are most likely to be wrong and we are like to see swings both just before and after the announcement so please, be vigilant.
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