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Fed comments set to revive markets and renew the dollar's trend

28 July 2021

Global markets seem to be in a phase where they are starting to live separately from economic reports and indicators. Otherwise, it is hard to explain why markets remained under pressure yesterday, despite very positive news. The International Monetary Fund raised its estimate for the GDP growth in 2022 from 4.4% to 4.9% after a 6% growth this year. Forecasts for this year were improved for the USA (from 6.4% to 7.0%), the Eurozone (from 4.4% to 4.6%), and the UK (from 5.3% to 7%). At the same time, China’s growth forecast has lowered from 8.4% to 8.1%, remaining at very high levels.

US house prices are going up at full speed, adding another 1.7% in May, according to FHFA estimates. Another well-respected survey, the Case-Shiller index, noted a 17% YoY increase in home prices in the largest US metropolitan areas, close to the record 17.1% achieved in 2004.

Along with house prices, consumer confidence is rising. The Conference Board index is at 129.1 in July compared to a peak of 132.6 in February 2020. 130-140 is the area of the historical highs that the index reached in 2018 and 2000. These are levels of peak optimism, and a subsequent reversal of sentiment could trigger a significant correction in the markets. Of course, market corrections are triggered not by consumer’s elation but by its cooling off. The logical response of policymakers to market records and consumer optimism would be to cut back on crisis support measures, and their unnecessarily rapid unwinding could trigger such a peak.

Still, there is not much reason for such fears so far as US lawmakers have been in no hurry to withdraw support but are considering all new stimulus packages. China has today reassured investors in the markets that there are no systemic risks to be feared and that a “crackdown” on several IT companies does not mean war on private business and stock markets. As a result, the Hang Seng index reversed to intraday gains, retreating from 12-month lows.

Also, the currency market is in a lull ahead of the Fed’s decision and comments on Wednesday evening. The continuation of the regulator’s soft stance could reinforce the dollar’s pullback from the highs of the range since November. If the Fed gives a clear signal of QE rollback, the dollar will return to growth and breakthrough resistance. Thanks to the prolonged consolidation since the beginning of the month, players pulled stop orders close to current levels, risking increased volatility.



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