Over To You, Jay

I couldn’t agree more.

Markets have struggled for clear direction this week, which is often the way ahead of a major risk event as money is taken off the table and new money not put to work.

No change in policy is expected and a substantial shift in tone by the FOMC appears doubtful. This year’s growth and inflation forecasts are set to be upgraded, although the former more than the latter, to reflect a turbocharged recovery and because of the recently approved fiscal stimulus plan.

“Most focus will be on the dot plot projections which back in December suggested flat rates through 2023.”

The better economic outlook, with faster vaccine rollouts and easing of restrictions, might lead to some Fed members bringing forward their rate hike expectations. These individual dots, while still representing the minority view, may grab the attention of markets.

The Fed’s view on higher interest rates up until now has been that they embody economic optimism. Striking a similar tone will potentially spark another bond yield surge which should also give another leg up to the dollar.

Whether that upside is capped by Chair Powell not deviating from the current ultra-dovish stance is a big question. Even when Powell would turn more dovish, the risks for higher rates is clear as the market tests the Fed’s determination if words come out without action.

It’s certainly a communication challenge for the FOMC at today’s meeting and most watchers hope the message is calibrated so as not to rock the already fragile bond market, and with it global risk sentiment. In which light, there may well be some technical tweaking with the Fed extending its US Treasury exemption from the Supplementary Leverage Ratio (SLR) as failing to do this is likely to push bond yields higher and see a selloff in stock markets.

Markets are fairly quiet this morning although the US 10-year yield is pushing above 1.67% to new cycle highs. The monthly fund manager survey by Bank of America released recently pointed to 2% being the level which the majority of respondents said would spark a 10% correction in stocks.

Any further dollar support might see EUR/USD test the current 2021 low around 1.1835, which is also the area where the pair’s 200-day simple moving average currently resides. A clear and sustained break could then mean a return to the sideways 1.16/1.20 trading range.

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