Central Bank Watch: Fed Speeches, Interest Rate Expectations Update

The June FOMC is in the rearview mirror, and the initial reaction by markets was that a more hawkish Federal Reserve was moving into focus on the horizon.

However, in the immediate aftermath, Fed policymakers are attempting to shape the narrative around what exactly normalization means: it’s not going to be quick.

For now, Fed funds futures are suggesting that the first rate hike will most likely arrive in September 2022.

In this edition of Central Bank Watch, we’ll review the speeches made over the past week by various Federal Reserve policymakers, including the Fed Chair himself. The June FOMC is in the rearview mirror, and the initial reaction by markets was that a more hawkish Federal Reserve was moving into focus on the horizon.

In the immediate aftermath of the June FOMC meeting where Fed Chair Jerome Powell said its time to “retire” the phrase “thinking about talking about tapering,” Fed policymakers have been in a pseudo-damage control mode, attempting to shape the narrative around what exactly normalization means: it’s not going to be quick.

June 23 – Kaplan (Dallas president) says that the US economy could “make substantial further progress,which I think willhappen sooner than people expect – sooner rather than later – and we’re weathering the pandemic, I think we’d be far betteroff, from a risk-management point of view, beginning to adjustthese purchases of Treasuries and mortgage-backed securities.”

Bowman (Fed governor) comments on the transitory nature of inflation, that “upward price pressures may ease as thebottlenecks are worked out, but it could take some time.”

June 22 – Powell (Fed Chair), at the US House Select Subcommittee on the Coronavirus Crisis, downplays high inflation, and says “a pretty substantial part, or perhaps all of the overshootin inflation comes from categories that are directly affected bythe re- opening of the economy such as used cars and trucks.”

Federal Reserve Interest Rate Expectations (June 23, 2021)

Gold, Crude Oil Price Forecast: Fed Narrative May be Challenged on US PCE,

Gold eyes high-impact economic data including PCE this week Crude oil strength supported by bullish technical picture XAU/USD puts in bullish “Golden Cross” technical formation

Gold could be in for quite the move in the coming days. The Federal Reserve’s most harped-on narrative – being the view that rising prices are “transitory” – may be challenged by several potentially hard-hitting economic events out of the United States this week. The yellow metal saw a big drop last week after the Fed signaled it may begin raising rates sooner than previously expected.

Thursday will see durable goods orders for May, and the final first-quarter read on gross domestic product (GDP) cross the wires. On Friday, the week will wrap up with the core personal consumption expenditure (PCE) print for May. According to the DailyFX Economic Calendar, analysts expect to see durable goods orders print at 2.8%, up from -1.3% in April. No change is expected in GDP at 6.4%.

That leaves PCE, with the core figure – which strips out volatile energy and food prices – looking at a 3.4% expected rise, up from 3.1% in April. The Fed’s baseline average inflation target is set at 2.0%, and while the US central bank concedes that we are likely to see higher prices as supply chain issues are ironed out, a higher-than-expected figure could fuel hawkish bets on policy expectations.

If that scenario plays out, rate traders could send Treasury yields higher, in turn, putting upside pressure on the US Dollar. A stronger US Dollar bodes poorly for gold prices by making it more expensive for non-USD currency holders to buy the asset. The question is, how high and for how long can upward price pressures last before the market disengages from the Fed’s “transitory” narrative?

Despite the dramatic fall in prices, the yellow metal’s technical posture looks due for a corrective move higher. A bullish Golden Cross formation between the 50- and 200-day Simple Moving Averages suggest upside momentum may soon emerge. The 1,800 psychological level poses the most immediate near-term resistance. Alternatively, the recent swing low at 1761.04 could provide a support zone to the downside.

GOLD DAILY CHART

GBP/USD Price Outlook: Pound Sterling Eyes BoE Rate Decision

Pound-Dollar has staged a healthy 170-pip rebound over the last three trading sessions GBP/USD implied volatility elevated due to event risk posed by the BoE rate decision Don’t miss our preview for the Bank of England meeting and how the GBP might react

GBP/USD price action has perked up a bit over the last few trading sessions. The Pound-Dollar seems to be ricocheting nicely off the 1.3800-handle, though this follows a bearish breakdown of ascending trend support. The 400-pip slide from year-to-date highs by GBP/USD largely corresponded with renewed covid concerns across the UK with selling pressure being exacerbated by the Fed’s recent hawkish pivot

That said, near-term outlook for the Pound Sterling and GBP/USD will likely be dictated by the upcoming Bank of England interest rate decision. As my colleague Justin McQueen points out in this BoE meeting preview, there are rising expectations  for a relatively more hawkish Bank of England. GBP/USD could extend its rebound if this is confirmed. The central bank is widely anticipated to leave its policy interest rate unchanged, and there will be no updated monetary policy report, so markets will likely place focus on guidance for QE.

The Pound-Dollar could see the 20-day and 50-day simple moving averages come into focus if there is a bullish reaction by GBP price action following the Bank of England. If the BoE decision disappoints hawks, however, traders might send GBP/USD snapping back lower toward the 1.3800-price level. This area of buoyancy is underpinned by the bottom Bollinger Band.

GBP/USD PRICE CHART: DAILY TIME FRAME (21 MAY TO 23 JUNE 2021)

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