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The Fed injects life back into FX, rates and Gold market

18 June 2021

We questioned if the FOMC meeting could spur some life back into the markets and eyed upside risks to the USD. Well, we saw that front and centre in the bond and interest rates markets. This spilt over into FX, Gold and to a lesser extent crypto too. Equities and specifically Tech, were surprisingly calm given the moves in real rates.

The stage is set for what I feel is a period of somewhat higher volatility as the narrative changes and traders adjust to a future reduction in liquidity conditions. Powell et al will make it clear that any changes will be glacial and will be communicated well in advance and there's no reason to believe we’ll see a collapse in risk sentiment.

However, should we see higher real rates in the bond market then we should see a higher USD regime and this will mean Gold will become a sell on rallies candidate. Emerging market FX could be a good guide here.

The Fed’s do plot projections have been the main attraction, but many question why on earth so many voters are calling for hikes in 2023 when core inflation is expected to fall back from 3% to 2.1% and around policy target? Still, the Fed downplay these projections, but the market has spoken and we’ve seen some aggressive repricing of the US interest markets, with Eurodollar futures pricing in 17bp, or 70% of one hike, by 2024 from this meeting alone.

Do look at the short video above as it gives a sense of the key dates that could rock markets from here, as we head through the Northern Hemisphere Summer and the potential for changes to Fed and other central bank policy settings.



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