The Week Ahead – US Fed Sees Taper Conditions Not Far Off

EURUSD weakens as US taper looms

The US dollar holds onto recent gains as markets price in the start of the taper for later this year.

While the Fed has not given any specifics, the prospect of winding down the stimulus by mid-2022 means that the process would start as early as November. A logical conclusion is that rate hikes may follow suit.

The only uncertainty for the dollar bulls is how much breathing room the Fed would give itself when it says that tapering is not far off.

Upbeat US growth data would raise pressure on the euro. A break below 1.1620 would trigger a broad sell-off as the dollar bears bail out. 1.1900 stays a major hurdle on the upside.

USDJPY rallies as policy diverges

The Japanese yen softens as Japan’s recovery seems fragile.

The Bank of Japan has acknowledged a weakness in exports, the country’s main growth engine amid supply chain disruptions. While consumption may resume as the pandemic comes under control, traders find it hard to buy into.

Meanwhile, the US Fed’s tangible tapering schedule is a stark contrast to the BOJ’s rosy projection. As long as Japan’s growth and inflation remain subdued, divergence in monetary policy would play against its currency.

The pair has bounced off the key support at 109.00. A close above 111.60 would send the dollar to 112.40.

NAS 100 rebounds as sentiment recovers

The Nasdaq 100 steadied after the market whipsawed over the fate of Evergrande.

Investors are wary that high valuations have made stock markets a house of cards. Cautious buyers would be trigger-happy at the first sign of distress.

This is the reason why fears that a default of China’s second-biggest property developer could disrupt the global financial system led to a fire sale. While the company struggles to meet its interest payments, global markets assess their exposure to avoid a “Lehman moment”.

The tech index has found bargain hunters on the first support line at 14800. A rally above 15700 would open the door to 16000.

UKOIL surges on supply disruptions

Brent crude hits a ten-week high amid supply constraints. The ongoing weekly drop in US stockpiles reflects disruptions in the Gulf Coast. US production remains paralyzed after the damage from Hurricane Ida, forcing refiners to draw on inventories.

Elsewhere, members of OPEC+ struggle to normalize their output due to maintenance works during the pandemic. Meanwhile, traders expect rising demand after the US lifts the travel ban.

This lag between supply and demand may fuel the rally for the coming weeks. The price is heading towards 82.00 after it broke above the major resistance at 76.00, and now 74.00 is the closest support.