Fed Chair Powell reiterated in his semi-annual hearing before the House Financial Services Committee that “significant further progress” on tapering is still a long way off. A more gradual approach to a taper schedule, according to TD Securities economists, should help keep the USD confined within recent ranges.
“The Fed chair said that there is no rush to taper QE because “significant further improvement is still a ways off,” but he also stated that the planning process has begun and that action will be taken soon if the recovery continues on track, as predicted. He also tried to downplay the increase in inflation this year. We continue to expect a formal announcement on tapering in December, but we anticipate more advance signaling in the months ahead.”
“In the coming weeks, the view on the curve and yields should aid to keep the USD within recent ranges.”
“We agree that central banks’ hawkish tilt has occurred at a time when global GDP and inflation have reached their peaks. This backdrop should help to keep the USD from falling too far. However, with the Fed deferring the taper decision for at least the next several weeks – and what appears to be months – currencies that trade at big discounts to the USD on short-term cross-asset valuation dynamics should see their spreads narrow.”
“To drive FX performance, we’re concentrating on the crucial hawks inside the G10. The RBNZ, the Bank of Canada, and the Norwegian banks are the clear frontrunners here, with the New Zealand dollar expected to experience firmer price action in the coming weeks. In the meantime, EUR/USD drops below 1.18 are likely to be difficult to sell.”/n
