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Feds hint at tapering but not just yet

USD: Despite the FOMC suggestions of QE tapering later this year, the impact on the risk sentiment was limited and non-negative as the message remained cautious. Markets continue to expect QE tapering to be formally announced in December, looking for the relatively swift reduction that sees QE purchases end in the second quarter of 2022 and two interest rate increases in 2H22. Particularly on the tapering side, the start of the process in December should not be perceived as aggressive. It should keep risk sentiment supported for the time being, particularly after the news that the Chinese regulator tried to ease global investors’ concerns about the latest regulatory crackdown. The stabilising risk environment should various, and currencies backed by hawkish central banks aka CAD to outperform.

CAD: Canada’s headline inflation faced a slowdown (from 3.6% to 3.1% YoY) in June. That is probably a welcome development by the Bank of Canada as it supports the central bank's view that inflation spikes will have a transitory nature. That said, it will hardly impact the BoC’s tapering plans. After all, the jobs market has proven to be very strong. Most remain of the view that the BoC will end asset purchases by the end of 2021 and that the case for the first hike in 2022 is getting stronger. From an FX perspective, the BoC’s hawkishness can help CAD outperform once market sentiment improves.

EUR: While the initial reaction to the July FOMC was higher EUR/USD, most expect EUR to be the laggard among G10 currencies and not really see any impact from the Fed’s communication. This is because the Fed will eventually be ahead of the ECB in normalizing policy, particularly next year – when the Fed fully ends QE and starts hiking. The bar remains high for EUR/USD to persistently and meaningfully break above the 1.2000 level.

GBP: Sterling continues to reap the benefits of the slowdown in Covid-19 cases, in turn reversing the prior market concerns about another meaningful wave. This means a further adjustment in the GBP lower is unlikely to materialize. Data-wise, June UK consumer credit and June mortgage approvals shouldn’t affect GBP in any meaningful way today.

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