FOMC Preview: Not expecting new signals on tapering – TDS

Next Wednesday, the Federal Reserve will announce its decision on monetary policy. No change in the policy is expected. Analysts from TD Securities do not expect any substantive new signal on tapering. They see a limited reaction in markets to the FOMC meeting. 

Key Quotes: 

“We don’t expect any substantive new signal yet on tapering—or tightening—even as the tone on the economy is more positive than in March. We expect the signaling to evolve over time as the recovery proceeds, and we just changed our forecast for the start of tapering to March 2022 from September 2022, but we expect officials will be reluctant to say anything that could be construed as a tapering countdown signal until much later this year.”

“We don't expect the Fed to announce any changes in the IOER or RRP rates next week, although increases are likely before too long due to downward pressure on money market yields from growth in bank reserves. Such changes, if they occur, should be viewed as technical adjustments.”

“With Powell staying as far away as possible from even giving a hint of taper, currency markets may find little to sink their teeth into at this meeting. Rates markets have pulled forward the first Fed hike to March 2023; any sooner seems like a rather high bar to overcome at this point.”

“We think a directional impulse in much of the FX complex is lacking. We think EURUSD may loosely be anchored between the 100/200dma ahead of the meeting. This leaves us thinking that USDJPY will be the pair to watch. In the absence of a major catalyst near-term, the technical setup and positioning/value backdrop may receive greater focus.”