FX Viewpoint | USD: What if the Fed delays tapering | Article – HSBC VisionGo
- The spread of the Delta variant has challenged the US economy, fuelling the idea that the Fed may delay tapering
- This potential delay could weigh on the USD, albeit temporary, in our view
- We expect the USD to strengthen gradually, due to the slowdown in global growth and the Fed’s path towards normalisation
The US economy is losing some speed, so there is a possibility that the Fed could soften its message
COVID-19 in the US has been challenging lately (Chart 1), and that has been cited as a near-term downside risk by the Federal Reserve (Fed). Indeed, the US economy is losing some speed. Our US Activity Surprise Index moved lower recently (Chart 2), as a few key US economic data have surprised on the downside, such as retail sales in July and job creation in August. All this fuels the idea that the Fed may delay tapering.
A potential delay in tapering would weigh on the USD, albeit temporary, in our view
A potential delay in the slowing of the Fed’s balance sheet would test the USD, although we believe it would be temporary. Once the spread of the Delta variant shows a sign of peaking, as it has done elsewhere, then the Fed would presumably resume its path towards gradual normalisation. In other words, the Fed may have some doubts about the US economy over the near term, but it is unlikely to abandon its long-term view and plan for monetary policy normalisation.
The Fed’s tapering may not immediately trigger a stronger USD, but this should set the course for wider policy divergence to play out for FX
We acknowledge that the Fed’s tapering may not lead to an immediate reaction and impact on the USD. What may matter more is that the Fed’s tapering brings the idea of rate hike expectations forward. It should also set the course for bigger policy divergence to play out for exchange rates.
We expect the USD to gradually strengthen over the coming quarters
All in all, the USD’s fortunes have been less straightforward compared to last year. We still believe the USD is gradually transitioning to a stronger path for two key reasons. First, global growth may be losing speed but is not seen as decelerating quickly. If we believed the latter could occur, then we would factor in a much steeper USD climb. Second, the Fed is edging closer towards eventual rate hikes, which should support the USD, especially when tapering actually starts.
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