Otherwise, a lacklustre print this Friday could ensure that this dollar index remains below its 200-day simple moving average for a while longer and pare more of its gains since the hawkish surprise at the June FOMC meeting.
Markets still guided by Fed’s tapering predictions
Arguably, the biggest theme in play across global financial markets right now is the predictions over the Fed’s tapering.
Considering the robust US economic recovery, the US central bank is expected to ease up on its bond purchases that have supported financial markets since the pandemic. Exactly when the Fed will embark on such a process, at what pace (how quickly it will unwind its bond purchases), and under what economic conditions – all those remain vague at this point in time.
What we do know is that, following last week’s July FOMC meeting, the Fed reiterated that it wants to see “substantial further progress” in the ongoing US economic recovery before it will taper. However, it remains unknown exactly what constitutes “substantial” enough for the Fed.
Conflicting tapering cues within FOMC and markets
This past Friday (30 July), Fed Governor Lael Brainard reminded global investors that the US jobs market is still a long way off from pre-pandemic levels. She highlighted the “shortfall of 6.8 million jobs” that needs to be restored before the Fed tapers.
On the other hand, there was the famed hawk, Federal Reserve Bank of St. Louis President James Bullard, who also on Friday expressed his desire for the tapering to begin this fall and wrapped up by March 2022. Most economists expect the tapering to only commence next year.
Amidst all these conflicting views, it remains to be seen how the forthcoming economic data guides, not just the consensus within the FOMC, but also investors’ predictions for when the tapering will actually commence.
More gains for stocks likely until tapering draws closer
As long as the Fed’s ultra-accommodative stance remains intact, that should allow for more upside for US equities in the interim. The S&P 500 is striving to carve out a sustainable presence above the psychologically-important 4400 mark, a feat made more achievable considering that bond yields have been relatively subdued of late.
