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Andreas Zanin
Analysis | July 6, 2021

Outlook and Forecast: Forex News The Fed Minutes in Focus & USD

In terms of the USD, the market still doesn’t see the tapering of stimulus coming quickly but that’s discounted and we have the Fed minutes on Wednesday 07/06 – Enclosed is our view on the likely market reaction. One point to keep in mind, in relation to the Minutes is that recently, the FED’s Reserve Repo Operations mean stimulus is no longer effective which points to an end but how quickly?

Reserve Repo operations give us clues that tapering could be closer than the market expects.

The facility usage jumped from 841bn to 991bn. The usage of the RRP facility simply counters the liquidity added via the Feds QE as money flows back to the Fed. We have more money flowing back to the Fed than they are adding each month.

The QE program has become less effective so unless the Fed accepts negative rates (which they are unlikely to do) so the high RR usage warns of tapering of stimulus. The first chart from Nordea, shows that while stimulus is in place, RR operations mean liquidity is coming our of the financial system quicker than its entering and the big increase in usage of RR can be seen on the second chart which comes from Credit Suisse:

The Fed Minutes …

 Andrew Hunter, senior U.S. economist for Capital Economics noted, “This was also the meeting at which Chair Jerome Powell finally admitted they began ‘talking about talking about’ tapering.”In Wednesday’s Fed meeting minutes,

 “We may see some clarification of what would constitute ‘substantial further progress’ towards the Feds goals. Comments from a range of officials following the meeting leave us comfortable with our view that most won’t judge that to be the case until late summer/early fall, with tapering announced around the time of the Jackson Hole summit or the September FOMC meeting.”

 The above is discounted the price but we would expect them to move sooner that September – there is no reason to wait in our view. If they don’t move quickly the market expects this so we could get a USD bullish surprise from the Minutes. The market has got addicted to easy money policy and the market doesn’t want to believe it will end.

 The market still remains short of the USD and this means, there are plenty of shorts to exit the market if the Fed minutes are more hawkish than expected. Even if they are not they won’t be more dovish which means the odds favour more USD strength in our view.

 Technical Analysis USD Dollar Index DXY

The USD has broken above the 0.9200 level and 20 day moving average. we think a bottom is in place and if we break nearby resistance we could see a major rally to the upside as the large number of speculators who are short are taken out the market on stop and if we dip we have solid double trend line support.

 

 

Research provided by LearnCurrencyTradingOnline.com

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