By Han Tan, Chief Market Analyst at Exinity Group
Asian stocks are mostly in the green, in step with US stocks that rose to new record highs. The dollar index is not straying far from the psychological 94.0 level, keeping spot gold below its 50-day simple moving average.
The Federal Reserve’s tapering announcement confirmed widely-held expectations, allowing equities to go about their merry way. The reaction across various asset classes, or rather the lack of it, is testament to the Fed’s tack in giving enough heads-up to investors and traders about the central bank’s policy intentions.
Fed Chair Jerome Powell is still holding fast to the “transitory” version of the inflation narrative and reiterated his stance of being patient with rates. Yet markets apparently differ, with Fed Funds futures still pricing in a rate hike by mid-2022.
Dollar awaits NFP cues
Understandably, Powell appears willing to lean towards the lesser of two evils, preferring to tolerate faster inflation as long as more Americans are employed. This conundrum will frame the markets’ collective mindset when the latest US non-farm payrolls report is released on Friday.
A positive surprise in the jobs report above the consensus reading of 450,000 should lower the bar for a first Fed rate hike, which in turn could strengthen tailwinds for the dollar and further suppress gold.
However, signs that the US labour market needs more time to heal would buffer Powell’s narrative and limit the greenback’s near-term upside.
Yet, if markets are correct in the timing of the liftoff in rates, the fear is that such an ill-timed move could trigger the next recession. Such concerns are set to hang over market sentiment in the coming months.
Sterling stuck over BOE decision
Less certain than the Fed’s tapering announcement is the BOE’s policy decision, with markets pricing in just about an even chance of a UK rate hike. The risk of a policy mistake by the Bank of England appears greater, judging by the pound’s reluctance to climb higher against the US dollar despite the more imminent prospects of a UK rate hike.
Such concerns have kept GBPUSD below its 50-day moving average even in the hours leading up to the meeting, with markets cognizant of the downside risks to the UK economic outlook.
OPEC+ likely to stay the course
Oil prices have tumbled closer towards the $80 psychological level ahead of Thursday’s OPEC+ meeting, where the alliance is widely expected to stick to its patient stance in restoring their collective output.
The 400,000 bpd figure remains the yardstick for the anticipated outcome; major deviations from that figure could shock oil markets and disrupt the supply-demand outlook.
In the unlikely event that OPEC+ succumbs to extraneous pressures from consumers and adopts a steeper increase in production levels, then we could see oil benchmarks dragged below the $80 mark.
However, should OPEC+ stay the course and adhere to their gradual approach in easing back supply cuts, a stronger floor will build, allowing market participants to hold on to expectations that markets will tighten into year end.
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