The week ahead preview: is the Fed ready to taper?

• Markets are  busy in the week ahead
• Key central banks are in focus including the most anticipated FOMC
• U.S markets will keep an eye on the tapering decision
• Technical outlook

Week ahead preview

Monday

The markets will be fairly quiet on a Monday as markets in the U.S prepare for tapering decisions ahead of FOMC. The spread of the delta variant will be closely monitored.

Tuesday

The markets are fairly quiet with the Aussie set to focus on the RBA minutes meeting just a week after the governor gave a speech and after the unemployment fell to 4.5%.

The RBA minutes meeting will reveal some of the key points made during the RBA rate decision.

The minutes could show details on when the bank is planning to increase rates, the Q3 economic projection which is expected to show that the GDP fell in Q3 due to the delta spread that has forced the country to return to lockdown. The minutes will give details of the Reserve bank plan to taper bond purchases from AUD5 billion to AUD4 billion to remain in place and bond purchases will be extended until at least February next year. The Aussie could find the news not attractive as the governor has already communicated this in his speech.

Wednesday

The US markets will be busy ahead of the Fed interest rate decision and the Fed monetary policy statement.

The focus will be on the PBoC interest rate before the markets can shift to the BoJ interest rate and monetary policy statement.

Later on the day, the focus will be on the Fed interest rate decision and monetary policy.

Due to rising inflationary pressures and the U.S. economy rebounding sharply from the COVID19 pandemic, Fed members’ notifications have been relatively strict in recent months. The minutes of the July FOMC meeting show that most policymakers believe that bond purchases may slow down before the end of the year, provided that the economy continues to perform as expected. Since then, the U.S. inflation rate has remained high – the overall consumer price growth rate in August was just below the 13-year high of 5.3%, and the core indicator was above 4% for the third consecutive month.

However, since the Jackson Hole meeting, US macro data has been somewhat disappointing, especially the August non-agricultural employment report. The US economy created 235,000 net jobs last month, which was far below market expectations of 750,000 and far below the 1.1 million recorded in July (Figure 3). The spread of highly contagious Delta variants has led to an increase in viral infections, posing downside risks to the outlook and, to a large extent, slowing down employment growth. So far, most central bank governors have extensively studied the impact of the latest wave of infections, although the recent surge in the number of cases and deaths gives the Fed at least one reason to decide when to adopt highly accommodative stimulus measures.

In addition to the bank’s quantitative easing announcement, market participants will also pay close attention to the bank’s latest dot matrix chart, which shows members’ expectations for interest rates within the forecast range. Since the inflation rate was much higher than expected when the latest forecast was released in June, we believe that these points may be revised upwards moderately again this month. Chairman Powell has made it clear that there is still a long way to go to raise interest rates, but inflation seems to have hardly eased in the short term, and a small number of additional voting members may see the need to raise interest rates before the end of next year. We believe this will push up the midpoint and achieve an interest rate hike before the end of 2022. However, given the market’s expectations for the first-rate hike before the end of next year, we believe that the U.S. dollar’s ​​response to the revised forecast may be more limited than usual.

We expect the dollar to instead take its cue largely from Powell’s comments on tapering. Following the August employment miss, we think that an official taper announcement this month is now in serious doubt. Most FOMC members appear comfortable with policy normalisation commencing this year, but the clear labour shortages and uncertainty surrounding the delta variant may, we think, push the taper decision to November. This, in our view, may be bearish for the dollar, particularly should Powell’s voice highlight concerns around the impact of the delta on the US economy, albeit this already appears largely priced in by the market.

On the other hand, confirming at this month’s meeting that tapering will begin in October or November may be beneficial to the US dollar, and we expect the currency to break the recent narrow range against the euro. For the first time in some time, there seems to be a clear disagreement among FOMC members. The pigeons seem to be in the lead at the moment, although if the upcoming inflationary pressures are unexpected and the labour market data shows that the August wage absence is an isolated event, this situation can easily change. Therefore, the uncertainty before the meeting is high, and we expect the US dollar to be particularly volatile.

Thursday

The markets are set for a busy session on Thursday with the BoE interest rate and monetary policy statement set to be the key event for the day.

The European markets will focus on the Germany PMI data for manufacturing and services sector. The Manufacturing data is expected to show an improvement in the manufacturing sector with services data set to show a slight improvement from last month.

An upbeat data could lift up the Euro currency before the focus can shift to the BoE interest rate.

The bank of england interest rate decision will be the key focus for the day and the sterling pounds will be waiting for the monetary policy statement to hear more details from the reserve bank. The bank is expected to keep the interest rate unchanged for now although the BoE governor Bailey has already confirmed that the minimum requirement for rate hike has been met with three committe members. The BoE will be expected to increase interest rate next year, no timeline has been given as yet.

The sterling pound is set for a volatile session with the U.K economy currently slowing down due to the spread of delta variant. After inflationary pressures have passed, it is appropriate at best to make a hawkish confirmation. But for its part, we believe that the Bank of England may be almost powerless to alleviate current market concerns, which currently prevent it from advocating a more aggressive and steeper walking cycle. The forward curve structure shifted slightly upward, but it began to stabilize after the first two or three interest rate hikes. On the face of it, the Bank of England’s guidance indicates that the market does not expect the bank to come close to actively shrinking its balance sheet.

The Canada retail sales data will be the last major event for the week and the day, the Loonie will be eyeing an improved data despite the economic momentum easing. Should the data show an upbeat the Loonie could get a bit of momentum.

Friday

The markets will be fairly quiet on Friday as the economic calendar features no major economic event which could spike the market volatility. The markets will be on a cause to finish the week higher after the central bank decisions. 

Technical outlook of GBPUSD

The Cable (GBPUSD) traded slightly lower on Friday after disappointing retail sales data from the U.K and the price is currently flirting at the support level of $1.37930.

Looking ahead, the FOMC will be closely watched as it could determine the next possible movement for the pair.

A move below the current support level could open room for further downside appetite for the market and the price could push lower to support of $1.37329.