Fed: Patient approach to tapering to cap further USD gains

In his semi-annual testimony before the House Financial Services Committee, Fed Chair Powell repeated that “substantial further progress” is still ways off regarding tapering. According to economists at TD Securities, a more patient approach to a taper timeline should help to keep the USD capped within recent ranges.

Powell's the name, patient's the game

“The Fed chair signaled no rush for QE tapering, as ‘substantial further progress is still a ways off,’ but he also made clear that the planning process has begun and that action is likely before too long if, as expected, the recovery remains on track. He also continued to downplay this year's surge in inflation. We continue to forecast a formal announcement on tapering in December, but we expect the advance signaling for tapering to build in the months ahead.”

“The outlook on the curve and yields in the coming weeks should help to cap the USD within recent ranges.”

“We are sympathetic to the notion that the hawkish pivot of central banks has come at a time of what we think is peak global growth and inflation. This backdrop should help to limit USD downside overall . But, with the Fed punting the taper decision for at least the next several weeks – and what seems to be months from now – should offer more breathing room for currencies that run large discounts vs the USD on short-term cross-asset valuation dynamics to see their gaps close.”

“We are particularly focused on the decisive hawks within the G10 to drive FX performance. Here, the RBNZ, BoC and Norges banks are the obvious frontrunners with the NZD likely to see firmer price action in the coming weeks. Meanwhile, dips below 1.18 in EUR/USD are likely to be difficult to sell.”

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