In the 27-28 April policy meeting, Fed Chair Powell reiterated that it was too early to talk about tapering. Meanwhile, US President Biden’s administration recently revealed a $1.8trn 10-year social spending plan. In the view of economists at HSBC, a patient Fed will remain a headwind to the USD, while the implications of the fiscal plan remain muddied.
The USD implications of the fiscal plan remain muddied
“The Federal Open Market Committee (FOMC) left the federal funds target range unchanged at 0-0.25%. The USD weakness was seen during the press conference where Fed Chair Powell reiterated that it was too early to talk about tapering. Mr. Powell also noted that employment was still 8.5 M below its pre-pandemic level and indicated that closing much of this gap would be an important criterion for tapering. As such, the release of Nonfarm Payrolls on 7 May is likely to be a market focus. We believe a patient Fed will remain a headwind to the USD.”
“US President Joe Biden’s administration recently unveiled a $1.8trn, 10-year ‘American Families Plan’. Now that the strategy on both social and infrastructure spending has been revealed, alongside the taxation proposals to fund it, the focus moves quickly to how much of the package can make it through the legislative process. For the USD, the implications of this fiscal plan remain muddied.”
“There is a trade-off between the cyclical upside for the USD and the structural deficit downside. As the USD is a ‘safe haven’ currency, there is also a trade-off for risk appetite between extra government spending and higher taxation. For now, we expect the cyclical and ‘risk on’ aspects to win out.”
“We expect some modest USD weakness this year, as the global economic recovery gains momentum.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.