MUFG on the Fed this week:
Fed in focus with USD set to remain supported as shorts are lightened
USD: Fed tapering discussions “progressing”. The primary macro event this week will be the FOMC meeting on Tuesday and Wednesday and these meetings are increasingly important given we are gradually approaching the time of commencing the tapering of QE. With the Fed purchasing USD 120bn worth of UST bonds and MBS per month, the scope for that being sustained is diminishing. We see no reason for the Fed to change course and expect Fed Chair Powell to continue expressing cautious optimism over the outlook and therefore signal that discussions on tapering QE are progressing. Earlier this month, Chair Powell stated that achieving “substantial further progress” with achieving the goals on inflation and employment required to start tapering was still “a ways off”. It would be difficult to drop that now given that comment was made after the NFP andCPI data but he may well express greater confidence on progress that could set the market’s up for believing Jackson Hole in August and the FOMC in September could be the key events to set up the start of QE tapering either at the September meeting or the meeting in early November.
