Tapered Fed QE, non-farm payrolls, risk of Wall Street volatility

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Fundamental US Dollar Forecast: Bullish

  • The US dollar rallied late last week as the market position for the Fed
  • QE cut is fast approaching, but what does the trajectory of the rate hike look like?
  • Risks appear on the upside for the greenback, eyes on longer-term bonds

The US dollar strengthened towards the end of last week as the yield curve flattened, likely reflecting rising Federal Reserve hawkish monetary policy expectations. This follows a week when US GDP slowed faster than expected in the third quarter. Meanwhile, the Fed’s preferred inflation gauge, Basic PCE, remained well above the central bank’s target.

All eyes are now on the November FOMC monetary policy announcement scheduled for Wednesday. Following a change in tone from the central bank on inflation, the monthly reduction in asset purchases should begin. This is expected at a rate of 10 trillion US dollars per month, which is expected to be completed by June 2022. However, how long will it take for rate hikes to follow?

Since the FOMC’s rate decision in September, markets have increasingly recognized a more hawkish Fed. Now, Fed Fund Futures reflect that markets are anticipating 2 rate hikes by the end of 2022. Prior to the September policy announcement, not even one rate hike had been fully integrated. higher on inflation.

Yet despite the rapid increase in bets on the Fed’s rate hike, the US dollar has struggled against its major peers. There can be 2 main reasons why. The first is on the table below. The average spread between the 10-year Treasury yield and equivalent developed country bonds has narrowed. This means that long-term rates have risen faster outside of the United States.

It seems logical. In countries like Australia, New Zealand and Canada’s central banks have all either completed or started quantitative easing. It’s no surprise to see the AUD, NZD and CAD among the top performing major currencies against the USD over the past month. With that in mind, a hawkish Fed could allow US long rates to outperform, opening the door to the strength of the greenback.

Another factor of pressure on the US dollar could be found in the stock markets. Global equities have managed to maintain bullish momentum despite the rise in hawkish central bank policy bets. The Dow Jones, S&P 500 and Nasdaq 100 recently hit new highs. This momentum does not bode well for the safe haven USD. Nonetheless, a resumption of volatility could be envisaged if a hawkish Fed encourages investors to record profits and / or redistribute their capital.

The week will also end with the October non-farm payroll report. Markets may pay more attention to wage data, which can have inflationary effects on the economy. Average hourly earnings are expected to increase to 4.9% year-on-year from 4.6% previously. This is still well above pre-pandemic trends and could influence the timing of Fed rate hikes going forward. Overall, the risks appear to be on the upside for the USD.

US dollar versus. Bets on Fed rate hike in 2022 and 10-year bond yield spreads

US Dollar Forecasts: Lower Fed QE, Non-Farm Payrolls, Risk of Wall Street Volatility

Chart created in TradingView

— Written by Daniel Dubrovsky, Strategist for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

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