Fed Delivers Dovish Taper, All Eyes on BoE Now

Wednesday’s trading was dominated by U.S. dollar weakness as the Federal Reserve delivered a dovish tapering. The market’s rate hike bets remained virtually unchanged after Fed Chair Jerome Powell said officials can be patient on raising interest rates. “We don’t think it is a good time to raise interest rates because we want to see the labor market heal further,” he said. Investors continue to see two quarter-point hikes in 2022 starting around mid-year. Attention will now be paid to Friday’s NFP report which could bolster rate hike bets if the headline figure impresses.

The taper announcement was delivered as expected with the committee saying it would scale back by $15 billion a month starting in November. In terms of the pace of tapering Powell said that officials are on track to wrap the process up by mid-2022 but can speed it up or slow it down depending on the economic outlook.

As for the inflation outlook, Fed officials retained their ‘dovish’ inflation-rhetoric. “Inflation is elevated, largely reflecting factors that are expected to be transitory,” officials said in the statement. “Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors.” Also here, we got a dovish statement.

With the FOMC decision behind us, the focus now turns to the Bank of England decision today at 12:00 UTC noon.

A rate rise in the U.K. would be the first since the pandemic from a central bank in the world’s leading economies. It would mark a far quicker move toward normalization than in the aftermath of the global financial crisis more than a decade ago. Economists see today’s decision as a very close call, with a Bloomberg survey showing 51% forecast a hold and 49% a hike. In case a lift-off will be delayed to December, investors could question the BoE’s credibility. Thus, the central bank will struggle to meet the already very hawkish market expectations.

GBP/USD technical view: Chances are in favor of the bulls. A higher resistance comes in around 1.3750 but a rise above 1.3780 could encourage sterling bulls for a test of 1.3820. Bears on the other side will wait for a significant break below 1.3550 in order to anticipate steeper losses.

DAX – Test of 16000 done

As expected in previous analysis the DAX hit a fresh high above 16000. We now see higher price targets around 16300. A current support zone is seen at 15700.

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