The Week Ahead – US Fed Raises Taper Odds While Others Think Twice

August 20, 2021

EURUSD tumbles on hawkish Fed minutes

The US dollar surged to nine-month highs after the taper talk hit the headlines once again. The Fed minutes from July’s meeting hinted at a potential trim of its bond-buying program later this year.

Despite a split over when to shift gears, there is an apparent consensus that the economic recovery is pushing towards the point of inflection.

This gives the next jobs reports all the importance as the consistent improvement would press the central bank to pull the trigger.

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The euro is heading towards November’s low at 1.1600, and a breach could accelerate the sell-off to 1.1400. 1.1800 is the immediate resistance.

AUDUSD weakens as taper goes uncertain

The Australian dollar plunged as risk sentiment took a hit.

After the RBNZ renounced its rate hike this month due to new Covid infections in the country for the first time since February, traders have grown wary of contagion on its Australian counterpart.

Lockdowns across Sydney, Melbourne, and Canberra see no sign of easing amid record new cases and economists expect this to take a toll on employment and wage growth. The RBA could also have to back-pedal with the market already pricing in the hike schedule into 2023.

A break below 0.7000 may trigger an extended sell-off towards 0.6600. 0.7400 remains a key hurdle ahead.

SPX 500 falls as recovery moderates

Global stock markets retreat on rising concerns about the recovery. The Fed’s lean towards a tighter monetary policy could be an excuse to take profit on sky-high valuations.

What really drives the market is the uncertainty around growth. The fear of inflation has become the fear of slowdown. Investors are all wondering when the music would stop, and the last thing they want to see is a premature ending of the QE that could derail the recovery.

The S&P 500 has met resistance right under 4500 and is struggling to hold onto the 30-day moving average. 4250 would be a key support in case of a deeper correction.

UKOIL falls on demand concerns

Brent crude took a nosedive amid a bleak outlook for fuel demand. Surging cases of the covid-19 delta variant have put major economies under lockdowns once again.

There is a growing concern that Europe and the US might suffer the same fate, which would halt global economic recovery. The travel industry remains the weakest link in the fragile balance between supply and demand.

As the holiday season draws to an end, oil consumption may have peaked while inventories keep rising. The imbalance is pushing the price to May’s low at 64.60, a breakout would extend the sell-off to 60. 71.70 is the first hurdle in the case of a rebound.

By Orbex