How hawkish will the Fed be?

Ahead of the outcome of the Federal Reserve’s policy meeting and Powell’s press conference later, the markets have stabilised further. European indices were sharply higher by mid-day in London, lifting US futures, along with many other risk assets such as copper and oil. In FX, risk sensitive commodity dollars were firmer with the pound and yen weaking against the US dollar.
 
Sentiment lifted
 
A report by Asia Markets said China’s government is planning to take control of Evergrande, which, if correct, would prevent the company from completely collapsing and limit contagion risks. Optimism about travel returning to some form of normalcy after the US announced it will allow fully vaccinated people to travel to the country has also helped to soothe investor nerves. But volatility could return if there is a hawkish tilt from the Fed, which may trigger some risk aversion.
 
All eyes on Fed

Investors are looking forward to the FOMC meeting and Fed Chair Jerome Powell’s press conference later. There will be a couple of things keep an eye on. First, Powell could provide an advance notice and lay the groundwork for a decision to slow it vast asset purchases program in November or December. The later tapering starts, the better it will likely be for risk assets – and gold. And vice versa. Second, we may even be lucky enough to get some clues in terms of what those reduced purchases may look like in terms of dollars per month. The bigger the reduction in QE, the worse it will be for risk assets. Third, the updated projections for interest rates could suggest policy might be tightened immediately after QE has ended, if we see a rise in projections for a lift off in rates in 2022. In the June meeting, 7 members had called for a rate hike in 2022. Three more votes and the median ‘dot’ projection of the members will move higher. This is not out of the question given the sharp increase in inflationary pressures we have seen in recent months, with container shipping rates and energy prices continuing their upsurge.

So, overall, there is greater risk that the Fed will come across as being more hawkish than in June. The dollar has been rising in anticipation of this outcome, but we could see an acceleration in that trend – at least in the short-term outlook and until we head from other central banks – most notably the Bank of England – later in the week.
 
Dollar Index poised for fresh yearly highs?
 
Meanwhile the dollar was little-changed, with the Dollar Index hovering around 93.20 where it has spent the bulk of the past several days. Will a potentially hawkish Fed cause the greenback to rally to a new high for the year?


Source: ThinkMarkets and TradingView.com