The Federal Open Market Committee decided to leave interest rates on hold and announced that tapering will begin In November, with monthly purchases being reduced by USD 15 billion, as expected. Policymakers adopted a more flexible tone by noting that the Fed is prepared to adjust the pace of purchases if warranted by changes in the economic outlook, with spectrum to adjust either way. However, the narrative from Powell had a modest hawkish shift, as the spokesman flagged that the increase in inflation is largely to be due to “factors that are expected to be transitory”, refraining from its September statement where he said that these forces are just “transitory”. However, policymakers also argued that “an easing of supply chain constraints is expected to support continued gains in economic activity and employment, as well as a reduction in inflation. Regarding the interest rate outlook, Chairman Powell reiterated that a rate hike won’t necessarily follow right away after the quantitative easing concludes and that the committee believes inflation will ease towards 2% in the second half of 2022, emphasizing that they have a lot of ground to cover regarding their employment goals. The U.S. dollar index, which tracks the performance of the greenback against a basket of six major currencies, moved sharply in both directions during Chairman Powell’s press conference, closing out the day with modest losses on Wednesday. However, as market participants await the Bank of England’s Interest Rate Decision, the mood remains relatively calm and the greenback seems to have regained its strength during the early hours of today’s trading session, erasing losses from yesterday. Surprisingly enough, the Fed’s withdrawal of stimulus announcement had little to no impact on market risk perception, as the S&P 500, once again, posted new all-time highs, while U.S. Treasury yields rose more than 3% on Wednesday and now holds above 1.6%, easing concerns over a flattening yield curve.
Following a volatile succession on Wednesday, the shared currency managed to register gains after the tapering announcement of the Federal Reserve, although, in the absence of follow-through spot momentum, the Euro slipped back to the negative territory on Thursday morning, erasing previous gains. The tapering announcement fell in line with market expectations, withdrawing USD 15 billion from November and holding the interest rate unchanged. However, Chief Powell gave an upbeat assessment of the economy, although he emphasized that the start of the tapering phase has no links to any immediate interest rate hike. Coming up, German Factory Orders and the Final October Services PMI in the Eurozone, as well as the European Commission releasing its Economic Growth Forecasts, are due.
The British Pound advanced 0.54% following the tapering announcement from Fed officials to withdraw USD 15 billion dollars on monthly asset purchases. Today, the Bank of England is expected to raise rates, although it doesn’t mean it will and uncertainty lingers in the air amid a split decision among Monetary Policy Committee MPC members. Market participants consider three main possible outcomes from today’s vote - hiking 15 bps and no attempting to push back on market expectations of further hikes in the pipeline, a hike with pushback against further hikes, or no hike. A ‘no hike’ scenario could come with policymakers throwing signals that the move might come next month. However, despite the MPC split between hawks and doves, the U.K. inflation is expected to hit 4% for the first time since 2008, during the second quarter of 2022, adding to the argument for the hawks to control upcoming inflationary pressures. However, the ongoing energy crisis, a revamp of covid-19 cases, and Brexit jitters raise concerns over tightening financial conditions in challenging times.
The Japanese Yen remained firm against the greenback after the all-important tapering announcement from the Federal Reserve during yesterday’s trading session, closing relatively unchanged within a tight daily range amid tight volatility levels. The JPY trades horizontally with slight pressure from the greenback amid a broader strength sponsored by U.S. treasury yields climbing back to 1.6%. Coming up, market participants will remain tuned to Jibun Bank Services PMI and Overall Household Spending readings featured in today’s economic Calendar.
The Canadian Dollar closed yesterday’s trading session on the front foot against the dollar, amid the tapering announcement from the Federal Reserve and the crude oil price action ahead of the OPEC + meeting. The West Texas Intermediate slumped 2.63% during yesterday’s trading session, due to risk-off flows amid Fed officials removing stimulus, as well as the upcoming OPEC meeting. The commodity attempted to recover some ground during the early hours of Thursday, benefitting the resource-linked Canadian dollar as black gold is Canada’s top export product. Today, all eyes are posed on the cartel meeting and any possible outcomes on crude oil output.
The Mexican Peso closed 0.91% higher against the greenback as Fed officials, despite initiating the tapering phase, emphasized that policymakers will refrain from hiking interest rates in the short term. Additionally, Mexico’s Central Bank released new figures which show remittances to Mexico totaled USD 4.4 billion in September, an increase of 23.3% annualized. This brings the aggregated total for the first nine months of 2021 to USD 37.3 billion, up 24.6% during the same period in 2020.
The Chinese Yuan sustained pressure following the tapering announcement to U.S Fed officials. Today, the People’s Bank of China (PBoC) set its reset rate higher after the Chinese Renminbi extended 0.13% losses looking to break a key level. The PBoC monitors the exchange rate and interest rate differential between the domestic and offshore renminbi and has successfully narrowed this through the occasional intervention of the market and its liquidity conditions. Policymakers are concerned about the impact of the offshore market on the internationalization of the Renminbi and how it would affect monetary policy and capital outflows by becoming a substitute to the domestic Renminbi.
The Brazilian Real rallied 2.24% during yesterday’s trading session amid U.S. policymakers announcing tapering its massive QE program while reassuring low rates in the short term. Hike expectations weighed on the greenback against most of its emerging market peers, which have already initiated its tightening cycle amid sustained inflationary pressures. Brazilian inflation edging over two digits spooked market participants and policymakers, pushing them to hike rates by 150 bps, and further hikes are expected. Additionally, Brazil’s Central bank published its quarterly bulletin which revised up once again their inflation projection and slightly lowered their growth figures for 2021.