Stock markets are mixed heading into the main event of these summer months. The outcome of the two-day Federal Reserve policy meeting concludes tonight with no new policy signals expected. This is an interim meeting with a statement and press conference which means we will not get updated projections or a new dot plot until the September rendez-vous.

“Substantial further progress” still elusive

The Fed and Chair Powell are expected to repeat that high inflation is mostly transitory so no change in the policy mix is needed. They are likely to reiterate that the labour market recovery still has further to go with employment levels more than six million lower than before the pandemic. The latest Covid variants add further, new uncertainty to the economic outlook that can be used to justify a go-slow approach to a policy shift.

That said, the recovery remains on track and there is growing hawkishness in the Fed ranks given elevated inflation and the strong economy. Falling bond yields is also a big extra monetary stimulus for the economy and likely adds to the uneasiness of the hawks.

Tapering can kicked down the road

Taper talk and timelines is essentially what the market is looking for. An acknowledgment of persistent inflation will get the hawks excited about more detail, which potentially comes at the Jackson Hole symposium in late August. The September meeting would then be where the market sees more tangibly hawkish Fed rate forecasts and confirmation that strategy discussions on tapering are underway.

But we are all well aware that the spread of the Delta variant, albeit limited in the US currently, the stalemate in Washington over more stimulus and even the latest global equity ructions emanating from China could make Chair Powell stick with his current stance.

Sterling turning?

USD is little changed on the day with DXY finding some support at last week’s low at 92.50. GBP is endeavouring to hold onto this week’s gains with the markets perhaps warming up to sterling as contagions ease. With EUR/USD now trading below 1.18, EUR/GBP is closing in on the July lows at 0.8499 ahead of the key cycle low at 0.8472.

GBP strength is a surprise to many who think the UK is set for more Covid waves. Perhaps, just perhaps, the vaccines are breaking the link between case rate and hospitalisations/deaths. All eyes are not just on the Fed, but also the “English Experiment”.

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