The week ahead is decisive for USD traders as three main events will dominate financial markets – the FOMC Meeting, the Advance GDP, and the Core PCE Price Index.
Last Thursday, the European Central Bank revised its forward guidance on interest rates to reflect the new strategy. It delivered a more dovish forward guidance, but the euro did not react. Summer trading conditions, plus the fear of a wrong positioning ahead of the important US data next week, resulted in tight market ranges.
FOMC Statement and Press Conference to Move the USD
This week it is all about the FOMC Statement and how the Federal Reserve Chairman Jerome Powell delivers the Fed’s message. He will likely reiterate that the tapering of asset purchases, currently running at $120 billion/month, is still far away into the distant future.
But inflation is pressuring the Fed. The sharp rise in inflation, and specifically in house prices, will likely pressure the Fed into sticking to its tapering prospects.
The market expects that the Fed will announce the tapering of its asset purchases in December this year and to effectively start the process in January 2022. A possible rate hike is seen only in December 2023, and so the short to medium-term focus is on tapering.
This coming Wednesday, the market participants will focus on how the Fed sees the Delta variant and the possible impact on the economy.
US Advance GDP
The US economy is expected to have grown by 8.5% in the second quarter. The report, released Thursday, will show the degree of economic reopening and how the fiscal and monetary stimulus has impacted the recovery.
The Fed will likely choose to stay deliberately behind the curve. Yet, there is room to surprise markets by, say, announcing the tapering decision at the August Jackson Hole meeting. The only way the Fed will do that would be for inflation to overshoot the target even more.
Core PCE Price Index
On Friday, the Core PCE Price Index in the United States is expected at 0.6% MoM, but the bias is that we will see a higher print. Given the sharp rise in inflation lately, which is running at rates not seen since four decades ago, the market expects inflation to keep rising. Supply bottlenecks caused by the economic reopening are the cause for the sharp increase in prices.
All in all, the week ahead is critical for the USD traders. Now that the ECB decision is behind, the focus will be on the USD, seen as having more room to gain against the euro and the Swiss franc.