November 3, 2021 10:50:36

After months of “will they / won’t they”, the Fed will finally announce the start of tapering at today’s meeting. A reduction of $15bn per month with net buying ending by the middle of next year is discounted. The focus will be on the inflation narrative and how the FOMC deals with “transitory factors” in its statement. (Remember there are no new projections or dot plots this month.)

If policymakers stick to their dovish bias with conerns about upsetting bond markets, the dollar will dip. Questions will be raised about rate lift off. Does tapering not result in polciy tightening soon after? Markets have priced in a 25bp rate hike by July next year and will be disappointed.

But the Fed may follow the path of other (dovish) central banks and recognise longer-lasting inflation in its assessment. Some analysts are calling for a faster pace of tapering and rate hikes after the end of bond buying. This should ease inflation expectations and support the greenback. Especially versus low yielding currencies (and central banks in go-slow mode towards policy normalisation) like EUR and JPY.

EUR/USD stuck below 1.16

The September FOMC meeting gave the dollar fresh momentum which triggered a break below 1.17. Cycle lows were made towards the middle of last month at 1.1524. But oversold conditions on momentum oscillators saw a rebound in the world’s most traded currency pair.

This bounce looks to have stalled above the August low near 1.1665. Selling pressure also kicked in around the 50-day SMA and a Fib level of the May to October just below 1.17. Prices dumped near to the cycle low and the reversal of Friday’s drop has hit a near-term wall in the 1.16 zone.

A more hawkish Fed and a taper pace greater than $15bn will see downside with 1.1524 challenged ahead of targets below at 1.15/1.1495. Trendline resistance from the June highs caps the upside in a zone around 1.17.

USD/JPY consolidates near 114

This major pushed decisively higher towards the end of September when US Treasury yields moved north. USD/JPY has a strong positive correlation with 10-year yields, as we have written previously.

Prices made a cycle high at 114.69, a level not seen for three years. But buyers have taken a breather here with the pair cutting way through the upper Keltner band. This corresponds with an area of resistance from previous highs in 2017 and 2018. There is also a major Fib level (78.6%) in this zone at 114.49.

Coiling prices should see range expansion in line with the dominant longer-term trend. Upside targets for bulls include 115.50 and ultimately above 118. Near-term support comes in at 113.25, the bottom of the recent range.