FOMC meeting this week may support dollar

Global stock markets wobbled in recent weeks as bond yields rose, driven by optimism in the vaccine rollout for Covid-19 and the resumption of consumption spending. The environment of rising yield is seen as a short-term boost for the U.S. dollar.

Higher interest rates in the U.S.?

The recent move in bonds fuelled expectations of higher inflation and investors worried it would prompt central banks to raise interest rates. Higher interest rates can knock down stocks with relatively high valuations.

Investors will be gearing up for Tuesday’s and Wednesday’s Federal Open Market Committee (FOMC) meeting where the Federal Reserve will deliver its decision on interest rates. The bond market in the coming week will likely take its cues from the Federal Reserve. Still, the increase in inflation would be temporary, it would be interesting to see how the U.S. Federal Reserve reacts.

It’s all well and good to say now that they won’t touch rates for a while, that tapering is not on the table. When inflation is actually at 3.5% and shows only modest sign of declining, it’s going to be a much harder position to defend.

The central bank is expected to acknowledge much better growth in the economy. Bond pros are also watching to see whether Fed officials will tweak their interest rate outlook, which now does not include any rate hikes through 2023. Many expect interest rates to continue to rise in the coming months and investors will have to continually grapple with the anxiety about economic overheating and Fed tightening.

Interest rates concerns also accelerated a market rotation, as investors took money out of expensive tech and growth stocks and put them into other cyclical sectors such as finance, energy and industrial. Stocks have rebounded in recent sessions but analysts still expect market conditions to remain volatile.

New goals for US vaccinations

On the vaccine front, Biden announced last week that he would direct states to make all adults eligible for the vaccine by May 1. Biden also set a goal for Americans to be able to gather in person with their friends and loved ones in small groups to celebrate the Fourth of July.

This will contribute and conspire towards optimism in the market and then towards that spike in the yield. The 10-year U.S. Treasury yield is likely to hit 2% by the end of the year but could spike well above that in the second quarter, the re-opening of the economy in the second quarter, when it’s hoped the vast majority of the U.S. population will be vaccinated against the coronavirus, will result in strong retail sales on the back of the U.S. government’s stimulus package.