How will Powell's assessment of inflation affect the market, and can the USD be the beneficiary in such scenario?
The Fed will announce the beginning of tapering, but what would be relevant and move the markets is the pace at which this withdrawal of stimulus will take
If the Fed sticks to the 15 B monthly forecast by the market, the reaction will not be relevant. Although in any case, the downward pressure on treasury bonds with the consequent rise in yields will gradually occur. But if the decision is to reduce more aggressively, the movement would be more intense.
Powell's assessment of inflation can affect the markets deeply. Suppose he stops considering it a transitory phase and start showing price increases concerns. In that case, the market will focus on the interest rate increases anticipated in the futures market as soon as next year.
In this scenario, the US dollar would be the beneficiary as it has been for months. Yesterday, the currency market experienced some lateral consolidation in most pairs except the Australian and New Zealand dollars.
The Australian dollar lost more than 1% against the euro and the US dollar. This occurred after Reserve Bank of Australia Governor "Lowe" said he believes the market overreacted to recent inflation data and that there is considerable inflation. Uncertainty about the growth of wages, although on the other hand, it was not so dovish in abandoning the control over the yield curve that it had been maintaining until now, and he commented on the possibility of increasing interest rates for 2023.
AUDUSD lost a full figure after the statement, dragging the NZD/USD in the same direction by correlation and also the yen pairs by the fall of the AUD/JPY cross.
From a technical point of view, it is reacting to a bearish divergence that had occurred in the daily RSI, but the move is still corrective to the last bullish leg without being considered a change in trend at the moment. Still above the 100-day SMA at 0.7380.
In the commodities market, oil continues with movements in ranges that seem to indicate a particular vulnerability of an excessively overbought oil. After the publication of the weekly API stocks, which came well above expectations, crude oil closed at the lows of the day, closer to the support zone of 80.69, a level below which it would open the way to deeper corrections.
The OPEC meeting at the end of the week could be the trigger for such a movement. Currently, the comments and statements of the producing countries do not point to any decision to increase production.
Sources: Bloomberg, Reuters
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