Fed Tapering and BOE to direct markets, NFP Eyed

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  • The BoE has decided to leave the key rate at 0.1%.
  • The rise of the delta variant will not hurt the economy.
  • The Fed’s tapping talks boosted the USD.

the US dollar was spurred on by many Fed speakers who spoke of a gradual cut, while the Bank of England decided to keep its key rate unchanged.

BoE policy remains unchanged

As expected, the Bank of England maintained its monetary policy parameters, keeping interest rates and ease of buying assets at 0.1% and £ 895 billion, respectively.

However, only one MPC member, Michael Sanders, voted against quantitative easing, which was seen as a critical reason that gave the pound a slight boost.

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The British central bank has indicated its willingness to impose negative interest rates in the accompanying monetary policy statement.

The Bank of England went on to say that a negative interest rate is not the preferable policy.

Nonetheless, negative rate rumors proved crucial in discouraging bulls from making aggressive bets and limiting gains for the GBP / USD pair.

The spread of the delta variant

The UK economy has grown sharply in recent months, with lockdown measures being reduced due to the rapid speed of vaccinations and previous lockdowns helping to contain the virus.

Despite the fact that the delta variety has spread, new cases have declined in recent days. This is unlikely to have had a negative impact on economic activity in England as all constraints have been substantially lifted.

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USD Rises After Fed Taper Speech

Yesterday we had the opportunity to examine the extent to which the market depends on the Fed’s monetary policy expectations. The main cause of volatility in the US and European markets, as well as the majority of global markets, is speculation about the timing of the Fed’s cut.

Yesterday’s disappointing jobs figures combined with hawkish remarks from Fed policymakers boosted the dollar.

The ADP report

According to ADP’s independent report, private sector job growth was only 330,000, half of what was expected and lower than last month’s data. This rate of employment growth is concerning, given that more than 6.5 million employees remain unemployed from pre-pandemic levels.

Not to mention the natural expansion of the labor market during those 16 months.

The ADP findings dampened expectations for Friday’s official statistics on non-farm wages and fueled speculation that the Fed would not need to cut its stimulus measures.

The ISM Service Purchasing Managers Index, on the other hand, was stunned with a record score of 64.1 points, including an increase in the employment factor. The figures give clues to Friday’s non-farm wages.

The data also put significant pressure on the currency while not providing significant support to the stock market. Investors worried about slowing corporate profits and sales growth.

Fed Conical Talks

Federal Reserve Vice Chairman Richard Clarida said he was in favor of announcing a cut as early as this year and saw upside risks to his inflation forecast.

While he did not support an outright cut in Fed bond purchases in 2021, he said it was already a step towards tightening.

Additionally, Clarida said demands for a rate hike could be met by the end of 2022, which, along with rising yields on U.S. Treasury bonds, has provided some support for the U.S. dollar.

According to prominent Fed hawk James Bullard, the upcoming dismantling of QE would pave the way for a rate hike as early as next year, if necessary.

Referring to the quantitative easing program, Dallas Fed Chairman Robert Kaplan said that “as long as we keep pushing forward in July and August jobs numbers, I think we better get started. to adjust these purchases soon ”.

He went on to say that an eight-month cut “plus or minus” would give the Fed “as much flexibility as possible to be patient and flexible on the federal funds rate.”

He stressed that it is “important to separate the discussion of the federal funds rate from the discussion of our purchases.” His remarks on buying are not intended to imply that he wants to take more aggressive action on the Fed funds rate.

In addition, another FOMC member Christopher Waller hinted a few days ago that the Fed is forced to start cutting balance sheet purchases by October.

The concentration of hawkish comments the day before radically changed the dynamics of the US currency. Following comments from Clarida and Bullard, the dollar index rose 0.5%, indicating a rise on Thursday morning.

The Fed’s current standoff between hawks and doves, as well as bulls and bears on the dollar, is expected to peak on Friday.

Labor market statistics could be a powerful justification for one side or the other, but the stock markets and the greenback can stay in narrow ranges until then.

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