The US Dollar has been little-changed on net since slipping in the wake of last week’s FOMC policy announcement, seemingly underscoring that move’s limited scope for follow-through. This is because the central bank’s cautious inching toward tapering QE was on-boarded as ‘dovish’ by investors that just recently balked at the idea of even considering conversation about stimulus withdrawal.
This probably signals to Fed officials that their “forward guidance” campaign is succeeding. The markets have seemingly acclimated to the inevitability of tightening, and even to its gradual onset in the foreseeable term. Chair Powell and company may now have room to escalate again, with the annual Jackson Hole symposium mere weeks away. The gathering is frequently a venue for previewing big policy changes.
The tone of incoming economic data now seems critical. If Fed is to convince markets to come along peacefully as it plants the seeds of normalization, investors will need to be reassured that the economy can stomach it. With the Delta variant of Covid-19 triggering at least some slowing of reopening global efforts – from tightened masking rules in some places to full-scale lockdowns in others – the threat to growth is palpable.
