22.09.202109:04 Forex Analysis & Reviews: Federal Reserve may hint at future cuts in bond purchases

The Federal Reserve will most likely hint at a future cut in bond purchases, all while convincing that such is not enough reason to raise interest rates. That may provoke another surge in volatility, as well as diversification and revision of portfolios by institutional investors.

But even though inflation in the United States did not reach new records, the situation may worsen in the coming months, which will make it difficult for the Fed to maintain a super-soft monetary policy. For now though the central bank will declare another long period of near-zero interest rates, with a cut of approximately $ 120 billion in monthly bond purchases. Formal announcement of tapering will most likely take place in November and December this year.

While all this is happening, the White House and US President Joe Biden will monitor statements made by incumbent Fed Chairman Jerome Powell. This is because Biden is still weighing the candidatures for the seat of Fed chief, but his aides will most likely recommend Powell. The final decision over this will be announced this fall.

Going back to Fed stimulus, a sharp decline in monthly bond purchases will significantly affect markets. If the central bank decides to cut the volume, US stocks will most likely fall, similar to the one observed on Monday.

On the bright side, economic data continue to perform well despite the threat from new strains of coronavirus. US GDP reportedly increased more than expected in the first half of this year, and unemployment dropped to 5.2%.

Sadly, not all members within the Fed are hawkish as some are wary of inflation and prefer a quick return to within the target range. But an early withdrawal of stimulus could create a number of problems during another outbreak of coronavirus, which is expected to happen this fall.

Back in July, many members spoke in favor of tapering, but they also argued that it is necessary to work out in detail the volume and rate of reduction in bond purchases since this will have a decisive impact on future financial conditions. So, interest rates are projected to hike by March 2023, but this may not be followed at all. There is a chance that things will change dramatically after today's meeting, especially if more officials become hawkish.

Talking about statistics, the volume of new US housing reportedly rose more than expected in August, as the figure jumped 3.9% to 1.615 million a year. Building permits also increased by 6.0% to 1.728 million, up from a revised 1.630 million in July.

With regards to EUR/USD, a lot depends on how long the bulls will be able to defend the 17th figure as a break out of this range will lead to a strong sell-off in risky assets. Such will push the pair to 1.1670, and then to 1.1650. But if traders manage to push euro above 1.1750, the pair will rise to 1.1790 and 1.1840.

GBP

Pound tried to hold on to large levels yesterday, but failed. Apparently, although there were many UK statistics released yesterday, it did not affect the market much.

Manufacturing orders were said to have risen 22% in September, which was the strongest increase since April 1977. Export orders also increased to -2 percent, the highest level since March 2019. Both were good news for the UK economy, but the bad report on public debt offset it. It reportedly surged in August this year, with net borrowing widening to £ 20.5 billion. Fortunately, the figure is still lower than last year, and government revenue was actually up to £ 5.3 billion. Spending also fell £ 1 billion from last year.

In any case, a lot now depends on the area of August 20 lows (1.3640) as a break through it will result to GBP/USD dropping to 1.3600 and 1.3560. But if for some reason the bulls manage to regain control over 1.3695, the pair will be able to climb to 1.3750 and 1.3805. Then, large sellers will try to return to the market around these levels.