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USD Outlook: $15B Taper Is Magic Number For FOMC

By Kathy LienForexNov 02, 2021 04:52PM ET
www.investing.com/analysis/usd-outlook-15b-taper-is-magic-number-for-fomc-200607150
USD Outlook: $15B Taper Is Magic Number For FOMC
By Kathy Lien   |  Nov 02, 2021 04:52PM ET
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For the first time since the pandemic began, the Federal Reserve will reduce the stimulus it has been providing. Given the significance of this move and what it means for the central bank’s economic outlook, the U.S. dollar should be trading much higher. However, there’s been very little demand for the greenback over the past two weeks because the Fed has done an effective job of preparing the market for the imminent change. It has been talking about reducing or “tapering” asset purchases for the past few months, giving investors plenty of time to position for the move. Bond yields soared and USD/JPY rose to its strongest level in three years just under two weeks ago, but since then, we’ve seen more consolidation than continuation.
 
The decision to taper won’t be the most market moving one on Wednesday. Instead, investors want to know when taper will end and rate hikes begin. Fed Chairman Jerome Powell previously said taper could be finished “sometime around the middle of next year.” A precise end date for QE will be positive for the U.S. dollar, although it could also be calculated by the amount of bond purchases cut per month. For example, if the Fed reduces bond purchases by $15 billion a month starting in November, it could be done buying bonds by June. Any number larger than $15 billion (between Treasuries and mortgage-backed securities) would be considered aggressive, while anything smaller would be considered conservative. The larger the reduction, the more upside pressure for the U.S. dollar and downside pressure for stocks. With the housing market refusing to cool, the Fed is unlikely to go for a smaller move. But based on the new highs in stocks, investors also don’t expect significant hawkishness.
 
The Fed will be reluctant to make any commitments about rate hikes. Powell will almost certainly downplay the need to change interest rates, but investors will make their own assumptions based upon how much it cuts asset purchases and what Powell says about inflation. CPI growth is at a 30-year high, but core PCE, retail sales, non-farm payroll growth and ISM manufacturing declined from the previous month. Right now, there’s a significant misalignment between investor expectations and Fed guidance. None of the members of the FOMC expect rates to rise in 2022, but the market is pricing in over 50bp of tightening next year. If the Fed fans those expectations by suggesting that prices are less transitory (or that word disappears completely), the U.S. dollar will rise. But if it doesn’t waver from its view that prices will fall, the disappointment will send EUR/USD and USD/JPY plunging. Before FOMC, ADP and ISM services, two important leading indicators for Friday’s non-farm payrolls report, will be released, making it a very insightful day for the greenback.
 
Most of the major currencies pairs consolidated with the exception of the Australian and New Zealand dollars. AUD lost more than 1% of its value versus the euro and the U.S. dollar after Reserve Bank of Australia Governor Lowe said he thinks the market overreacted to recent inflation data and there is considerable uncertainty on wage growth. With that said, the RBA was not that dovish. It stopped targeting a cap on three-year government bond yields and indicated that a 2023 rate increase – instead of rate increase in 2024 – is now plausible. The New Zealand dollar fell in sympathy with the Australian dollar ahead of a potentially softer third-quarter New Zealand employment report.
 
USD Outlook: $15B Taper Is Magic Number For FOMC
 

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USD Outlook: $15B Taper Is Magic Number For FOMC

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Comments (22)
Jac Meeouff
Jac Meeouff Nov 04, 2021 9:52PM ET
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Let the american dollar die supporting it is costing trust and cashflow issues EVERYWHERE kyl the beast cut off its blood supply and let the world move on
Adebayo Oyebami
Adebayo Oyebami Nov 03, 2021 8:23PM ET
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A newcomer member
Francesco Lucchesi
Francesco Lucchesi Nov 03, 2021 6:52AM ET
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fed will likely delay until December meeting.
Stephane Adam
Stephane Adam Nov 02, 2021 11:10PM ET
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$20B per month, the Fed must demonstrate that it is capable of fighting inflation, before it is too late, because for the moment it has done nothing and is losing credibility.
George Pichurov
George Pichurov Nov 02, 2021 11:10PM ET
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It hasn't done nothing, it's done a lot to support inflation.
MuraliKrishna Brahmandam
MuraliKrishna Brahmandam Nov 02, 2021 10:22PM ET
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But unfortunately I am not the Fed, Dr. Jerome Bubble is. He ought to be relieved of his constipation and the job. He has been riding the lion he does not know how to get off.
MuraliKrishna Brahmandam
MuraliKrishna Brahmandam Nov 02, 2021 10:18PM ET
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If I were the Fed, I would taper $30B month, drop stocks big that would drop rates, spike gold for people to sell off all their gold, lower USD for more exports, and wait for inflation or not.
Jac Meeouff
Jac Meeouff Nov 02, 2021 10:18PM ET
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That to intelligente for america. I hope they get allll the burn thats comming if they dont stop the bs
ECL SALES
ECL SALES Nov 02, 2021 9:50PM ET
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Hmm
MuraliKrishna Brahmandam
MuraliKrishna Brahmandam Nov 02, 2021 9:29PM ET
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USD will drop big because of heavy whipping and whipping good by Fed that will tank stocks and lower rates
Chuy Martinez
Chuy Martinez Nov 02, 2021 9:11PM ET
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Unbelievable article as always, it pours beautiful, amazing insightful info! My team and I have followed Kathy for the past three years! If there were a service cost, we would pay it!
MuraliKrishna Brahmandam
MuraliKrishna Brahmandam Nov 02, 2021 9:00PM ET
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$20B per month Fed is gonna Whip it and Whip it good to thwart spike and bust
 
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