Week Ahead: Fired Up Dollar Looks To PCE Inflation; Flash PMIs And BoE Eyed Too
XM Group | Jun 18, 2021 09:04AM ET
Dollar biggest winner after hawkish FOMC as yields fall back
The June FOMC meeting turned out to be quite a decisive one for the greenback but whether anything has changed palpably for the markets is questionable. The fact is, there were a number of hints by Fed policymakers in the runup to the meeting that the time to start talking about tapering may be nearing and the consensus view of when policy tightening would begin had long been forming around September, and that has not changed.
That said, the hawkish shift was unmistakable as FOMC members pencilled in not one but two rate hikes for 2023, having only in March predicted that they would stay on hold through the year. More concerning is that Fed Chair Jerome Powell is no longer so sure that the spike in inflation will be transitory.
However, although Treasury yields shot up after the meeting, they had fallen excessively in the prior days and the 10-year yield has only managed to return to the range it had been consolidating in for most of April and May. The more notable impact has been on the dollar, which had been slowly creeping higher since late May, only to be held back by the baffling slump in yields. But now that yields have bounced back, there’s nothing stopping the dollar from powering ahead.
On Thursday, the Ifo business climate gauge out of Germany is expected to paint a similarly rosy picture for June.
However, another set of robust survey showings might not necessarily be significant enough to bolster the euro given the growing divergence in monetary policy between America and Europe. After plunging below $1.20 in the aftermath of the Fed meeting, it will be difficult for euro/dollar to reclaim the psychologically important handle solely on the back of some upbeat data.
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