FX Spotlight | USD softens as Fed Chair Powell offers neutral tone | Article – HSBC VisionGo
- The USD weakened after Fed Chair Powell – at the Jackson Hole summit – reaffirmed the possibility of a taper this year
- Yet, we expect this USD softness to be short-lived
- Our economists expect forward guidance to be modified at the September FOMC meeting, with a taper over an eight-month period to be formally announced in December
The USD weakened after Fed Chair Powell’s comments at the Jackson Hole summit, which were generally neutral
The USD weakened following the Federal Reserve (Fed) Chair Jerome Powell’s speech on 27 August at the Jackson Hole Economic Symposium where he reaffirmed the likelihood, already laid out in the July Federal Open Market Committee (FOMC) minutes, that tapering would begin before year-end (Bloomberg, 28 August 2021). He did not suggest that the taper process would begin any sooner than previously thought.
The weakness in the USD will prove to be short-lived, in our view
Earlier last week, the USD had weakened, perhaps anticipating Powell would emphasise the heightened uncertainty and downside risks to economic growth from the spread of the Delta variant. However, in the day leading up to the speech, we heard from several Fed speakers (such as Dallas Fed President Robert Kaplan, St. Louis Fed President James Bullard, and Altanta Fed President Raphael Bostic) who indicated a preference for a swift move to taper despite COVID-19’s new prominence (Bloomberg, 28 August 2021). The fact that Powell chose not to echo these hawkish sentiments in full has seen the earlier weakness in the USD resume. However, we suspect this softness in the USD will prove to be short-lived.
Our economists expect a taper over an eight-month period to be formally announced in December
Our economists still think the Fed is likely to indicate in its 21-22 September FOMC statement that economic conditions have moved even closer to the “substantial further progress” standard for tapering. Our economists also still expect a taper to be formally announced in the 14-15 December FOMC meeting, but the 2-3 November meeting is a very close call. Powell’s comments shed no light on the likely composition and duration of tapering. Our economists’ view on both is along the lines of that set out by Dallas Fed President, Robert Kaplan, recently whereby Fed purchases of Treasury securities would be reduced by USD10bn per month and purchases of mortgage-backed securities (MBS) would be reduced by USD5bn per month (Bloomberg, 26 August 2021). Under this scenario, tapering would be concluded over an eight-month period given that the Fed is currently purchasing USD80bn per month in Treasury securities and USD40bn per month in MBS.
We expect the USD to strengthen gradually in the months and quarters ahead, driven by taper prospects and eventually rate differentials
Powell’s speech may have disappointed hawks and USD bulls alike, but it is still part of a steady, gradual, and well-telegraphed shift towards policy normalisation. In turn, this has prompted a transition in how the USD is viewed. The headwinds the “safe-haven USD” faced in the past as the global economy recovered, have turned into tailwinds as the US revival prompts the USD to be viewed instead in terms of taper prospects and, ultimately, rate differentials. It is a transition which, we believe, points to further modest USD strengthening in the months and quarters ahead, the pace determined by the data and the associated Fed rhetoric.
With Chair Powell’s speech now in the past, the focus is likely to move quickly to the release of the US employment report for August on 3 September, as the evolution of the labour market remains central to the prospects for taper timing.
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