U.S Fed preview: Is the Fed ready for tapering?

The highlight for the week will be the Feds monetary policy decision. The market is generally expected to maintain the $120 billion bond purchase scale, but the Fed may remain cautious because the recovery of Covid is an obvious concern, and Fed Chairman Jerome Powell (Jerome Powell) has made it clear that he hopes to look at employment for further progress.

At the Jackson Hole seminar, Powell stated that “we still have a lot of work to do to get the maximum employment”, and since August‘s employment numbers were clearly disappointing (235,000 vs. a consistent 733,000), he will remember to postpone the setting Until there is better news. We expect the announcement to be released in November, but for now, we can only expect cautious optimism and more explicit support for this year’s reduction. However, it should be emphasized that this decision is completely independent of the decision to raise interest rates there is no way to automatically raise interest rates.

U.S Fed preview-what we can expect？

As the Covid cases seem to have peaked and the labour market is more constrained by labour shortages than weak demand, we expect the QE expansion announcement to be released in November. At present, we can only look forward to the cautious optimism in the statement and more clear support for the throttling of Jerome Powells press conference this year. We also want to emphasize that this decision is completely different from the decision to raise interest rates—there is no automatic path to higher interest rates.

The new forecast will show that as inflation is revised upwards, growth will be revised slightly downwards. The big story may be the Feds single-point forecast of interest rate hikes. Currently, 7 out of 18 officials use 2022 as the starting point for their salary increase, and one or two may advance their forecasts to 2022. We suspect that the current median will remain at 2023, but this will be a close decision.

The interest rate market will focus on three things. First of all, as long as there is any sign that it is about to taper. Second, any rearrangement of points. Third, any improvement on the repurchase transaction. The first one is about the back end. Although it is not expected to announce its withdrawal, any nod may push up long-term interest rates. The second is more front-end influence. At present, the 2-year return in the 20bp area contains the smallest risk of interest rate hikes and will continue into the third quarter of 2023. If you move this forward one year, then the 2-year discount looks wrong. The upward pressure on 2-year returns should continue. This is the most likely outcome of that meeting and will have a major impact.

The U.S dollar is back on track for gains as it begins the week higher ahead of the U.S Fed decision, traders are eyeing a signal on tapering.

The U.S. dollar also appreciated against the New Zealand dollar last week. NZD/USD fell after testing the falling wedge-shaped ceiling, which opened the door to the floor. Although the outlook remains bearish within the boundaries formed by the chart, the pattern is typical.

Ahead of the Fed decision, the pair will be eyeing the support level (Blue) for a downside direction, the opposite can happen if the price moves above the wedge ceiling.