Week Ahead – Fed to steer away from taper signals
XM Group | Jun 11, 2021 07:52AM ET
Fed to stay quiet on tapering
It's been quiet in the forex arena lately, with the dollar pinned down by sinking US real rates and volatility being suppressed in general. The plunge in real US yields comes down to the interplay between inflation and Fed policy.
When inflation accelerates, markets normally start pricing in higher rates by the central bank to keep inflation under control. That hasn't happened this time, as the Fed remains adamant this inflation episode will fade soon and is unwilling to even discuss an exit plan from cheap money policies. As a result, real (inflation adjusted) yields have crumbled, annihilating the dollar's interest rate advantage.
All told, the longer-term outlook for the pound remains favorable. These risks could spark a correction, but not much more. The economy is already almost fully operational so a minor delay wouldn't hurt much, and sterling has absorbed negative Brexit headlines several times without much damage.
Canadian, Australian, and New Zealand data coming up
It's a packed week for the commodity currencies too. In Canada, inflation data for May are out on Wednesday and could be crucial in determining how quickly the BoC will reduce its asset purchases.
In Australia, the minutes of the latest RBA meeting will hit the markets Tuesday, before the jobs report for May is released on Thursday. New Zealand's GDP for Q1 is also due on Thursday, but it might be seen as outdated.
Finally, the monthly data dump from China is due Wednesday. Retail sales, industrial production, and fixed asset investment will tell us how the recovery progressed in May.
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