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Fed leaves the conical genius out of the bottle
The FOMC’s latest decision, while not pointing out any immediate change in monetary policy, put on the table a possible delay in Fed bond purchases. Markets reacted accordingly by increasing bond yields, lower stocks and the higher dollar.
Why did the markets react negatively?
Markets operate as expected. The expectation now is that it will be a matter of when, not whether the Fed will start to shrink. It’s like leaving the conical genius out of the bottle. Once you let it out, it’s hard to get back in.
What does this mean for trade?
I will let economists analyze the FOMC meeting.
I prefer to look at how to operate in the future. In this regard, U.S. economic data will be closely monitored for any signs that the Fed is on track with its timeline or that it is lagging behind the curve. The first would allow the Fed to dictate the time to start shrinking. In the latter case, bond yields would increase based on expectations that the Fed should begin to decline sooner rather than later.
Looking to the future, mark August 27-28 on your calendar when Fed Chairman Powell speaks at Jackson Hole, a time when policy changes are often announced. It remains to be seen whether this means a higher set of ranges for the dollar or more sustained trends. At the very least, the dollar (and yields) should find a flat during the summer months ahead of this key Jackson Hole event now that there is an expectation of a Fed cut.
For those looking for the dollar bias, look at 1.20 EURUSD as it will set its overall tone. For those who want to identify when there are trade imbalances and what part of the trade is, I suggest you look closely
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