FOMC Minutes: Door open to start QE tapering – UOB

Pablo Piovano FXStreet

Senior Economist at UOB Group Alvin Liew reviews the latest publication of the FOMC Minutes of the 27-28 meeting.

Key Takeaways

“While the latest July FOMC minutes showed that the Federal Reserve (FED) could reach the standards set out to start QE tapering this year, it also highlighted there remained significant differences among the FOMC members on the timing of QE tapering as they differed in their views about the economy, the persistence of high inflation, ongoing labor market developments and the risk to recovery posed by the COVID-19 Delta variant.”

“The minutes generally painted a positive outlook for the US but there were reservations/ cautious views among FOMC officials considering the supply constraints & bottlenecks, and the challenges posed by the COVID-19 variant. The views on inflation were wide ranging, from being transitory, to being persistent into 2022, to the re-emergence of significant downward pressure on inflation.”

“The latest FOMC minutes did not change our view. We still expect the first indicative hint of QE tapering to be released during the Jackson Hole Symposium (26 Aug) and further articulated into a pledge of the taper timeline in the 21/22 Sep 2021 FOMC. We expect the first taper to be carried out in Dec 2021 and the tapering process will last for nearly 1.5 years until May 2023. Thereafter, we project two 25bps rate hikes for 2023, first to 0.25%-0.50% in Jun and to 0.50%-0.75% in Dec.”

Author

Pablo Piovano

FXStreet

Born and bred in Argentina, Pablo has been carrying on with his passion for FX markets and trading since his first college years.

AUD/USD flirts with 0.7000, lowest since early August amid bullish USD

AUD/USD hits a fresh low since early August during the Asian session on Friday and looks vulnerable near 0.7000 after breaking below the 200-day SMA overnight. Against the backdrop of the hawkish Fed, a two-day rally in oil prices revives inflation fears and continues to push US bond yields to multi-year highs. Adding to this, geopolitical risks lift the US Dollar to a two-month high, overshadowing RBA rate hike bets and weighing on the pair.

USD/JPY pulls back from three-week high after failing near 159.00

USD/JPY edges lower during the Asian session on Friday, stalling its recent strong move to a three-week high of 159.00 as Japanese Yen bears turn cautious amid intervention fears. Meanwhile, the US Dollar retains a strong bullish undertone as the Fed's hawkish outlook and oil-driven inflation fears continue to push US bond yields to multi-year peaks. Furthermore, the BoJ's dovish rate hike last week might cap JPY and support spot prices.

Gold treads water below $4,300

Gold grabs some buying attention and advances marginally at the end of the week, partially retracing the weekly decline, although it is still navigating below the key $4,300 mark per troy ounce. The fresh selling bias on the Greenback and the modest decline in US Treasury yields appear to support the humble advance in the precious metal.

Week ahead: Rate hike bets face a crucial data week

Despite the solid drop from the mid-September high, oil prices remained in the driver’s seat for another week, setting the tone in financial markets. Six months have passed since the late-February start of the US-Iran conflict, and there is still no breakthrough in the stalled talks, despite pressure from regional leaders and the rest of the world.

CFTC Report: Defensive currency positioning takes hold

The week in one sentence: Sterling and Euro shorts deepened in the week to September 22, while Yen longs were cut sharply. Oil positioning improved despite a steep price decline, and Gold exposure remained crowded. The main signal was a more defensive currency positioning backdrop.

Fed vs BoJ: Both hiked. The market only believes one of them – and the chart shows which

The Fed and the BoJ have just done something remarkably similar. Both central banks raised interest rates by 25 bps last week, both are confronting inflation risks, and both signal that future decisions will depend on incoming economic data.