- USD in broad losses after Fed goes steady
- Rejects tapering & normalisation talk
- Says focussed on labour market
Above: Federal Reserve Chairman Jerome Powell. Image © Federal Reserve.
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The U.S. Dollar deflated in broad overnight losses, enabling the Pound-to-Dollar exchange rate to decisively reclaim 1.39 before looking toward the landmark 1.40 handle after the Federal Reserve stayed a steady and stable monetary policy course in April.
Dollars were sold in exchange for almost all major developed and emerging market currencies, though safe-havens like the Japanese Yen and Swiss Franc were laggards after the Federal Reserve (Fed) left all of its policy settings unchanged late and reiterated a now familiar message late on Wednesday.
It was never contested that the bank would leave the Fed Funds rate range at between 0% and 0.25%, with its $120BN per month of bond purchases continuing unchanged, though some voices had argued there was a chance of it hinting about the likely timing of eventual changes to its set up.
To some extent the bank obliged when Chairman Jerome Powell said the “substantial further progress” towards the employment and inflation goals the Federal Open Market Committee (FOMC) wants to see before tapering, could be loosely translated to a “string” of blockbuster payrolls reports are required.
"This time, he didn't bother to laugh before saying, yet again, that it's too soon to talk about tapering, and that the Fed will communicate its plans well before any action is taken," says Ian Shepherdson, Chief Economist at Pantheon Macroeconomics.
"That requires "substantial progress" towards the Fed's employment and inflation objectives, which manifestly has not been achieved, or anything like it,” he adds.
Above: Pound-to-Dollar rate shown at daily intervals alongside Euro-Dollar rate.
The U.S. employment report for March saw the economy either created or recover from the coronavirus some 1 million jobs.
Previous to the pandemic period anything more than a 250k non-farm payrolls gain was generally considered to be something like a blockbuster in the markets.
But, and just like elsewhere in the world, pandemic period job losses have been even larger than the gains or recoveries seen thus far with some 8.5 million still required for full recovery.
And with statistical base effects set to wreak havoc on inflation numbers as well as other economic barometers for some time yet; it could be year-end before the Fed gets a reliable string of anything to play with.
"For both policy goals, actual outcomes will dictate the decisions of the Committee not forecasts. We therefore believe the FOMC will hold the line on their expectations for policy for many months. And a taper of asset purchases is unlikely to begin until the second half of 2022," writes Elliot Clarke, an economist at Westpac.
GBP/USD Forecasts 2021
Period: Q2 2021 Onwards
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The Fed’s approach to interest rate, quantitative easing and other monetary tools used to attain its 2% inflation target has been different to in the past and also different to a great many other central banks including the Bank of England (BoE).
Since summer 2020 it’s been working to an average inflation targeting strategy where it seeks to compensate for past periods in which inflation has been below its 2% target with a period of time over which price growth is allowed to rise above the target without drawing any interest rate rises.
“The chairman remained quite dovish on the inflation outlook, even as he expressed optimism about how stronger growth in the year ahead is unlikely to lead to a persistent rise in inflation," says Kevin Cummins, chief U.S. economist at Natwest Markets.
"Of course, inflation will be key to tapering as well as tightening, and here Powell sounded fairly skeptical that a few strong quarters for growth will suddenly lead to a sustained pickup in the trend in inflation,” he says.
Above: U.S. Dollar exchange rate performances over selected timeframes. Source: Netdania Markets.
The Fed is explicitly seeking to generate a larger dose of inflation than other central banks because it wants greater assurance that sufficient price growth will be sustained over the longer-term, although this evidently requires a longer period of ultra accommodative monetary policy than is seen elsewhere.
The Fed’s policy is such that there’s even a genuine possibility the European Central Bank could end up tapering its Pandemic Emergency Purchase Programme before the Fed actually lifts a finger while the ECB was already barely matching the Fed each month in bond purchases even with its “significantly higher” weekly pace.
“Thinking of the Fed more than the White House, historians will also point out that well after Nero’s populism, Emperor Diocletian was forced to introduce his ‘Edict on Maximum Prices’ to try to order inflation caused by constant monetary debasement to disappear. That policy certainly went up in flames,” says Michael Every, a global strategist at Rabobank.
The Fed is pursuing its new strategy at a time when Washington is pumping as well as planning to inject trillions worth of fiscal stimulus into the economy in a process that has gotten some fearing a sharp uptick in inflation.
Above: U.S. Dollar Index shown at daily intervals alongside gold price (orange line).
As a result of the Fed is falling behind the central bank curve as well as eating the Dollar’s lunch, which is not good for those still bullish on the outlook for the greenback as combining rising inflation with interest rates that are pinned the floor is a recipe for eroding the interest returns earned by those holding the U.S. currency.
In addition, the Norges Bank has telegraphed clearly to the market that it could actually lift Norway’s interest rates before year-end while some analysts have suggested it might yet choose to move sooner than that and as early as summer.
With the exception of the Euro, each of the above referenced currencies was already among the top performers of 2021.
However, currency market price action overnight and into Thursday saw the Dollar left behind alongside the Fed on a broad basis, at the tail-end of a month where its 2021 rebound has all but unwound ahead of what may yet shape up as a European summer.
We expect the FOMC to start discussing tapering its asset purchases in Q3 2021 and to taper in Q4 2021. The risk is the FOMC is very cautious and delays taking the first steps to normalising policy. Low interest rates amid an improving US and global economy is a recipe for the USD to continue decreasing,” says Joseph Capurso, a strategist at Commonwealth Bank of Australia.