Markets are treading water ahead of the FOMC decision on Wednesday and a deluge of quarterly earnings reports. After a month's respite, the global reflation theme looks set to make a comeback, driven by a strong rebound in the US economy.
OPEC+ meets today and the critical question for the group will be whether or not to delay or slow the production increase planned for the next few months in light of the worrying surge in coronavirus infections in India. While macro indicators are generally positive, with global inventories falling and demand recovering in most regions, the prospect of mobility restrictions in one of the world's biggest oil importers may once again lead the group to adopt a more cautious stance.
The USD is still rangebound ahead of the FOMC, but the focus is on whether the April selling might accelerate with the Q1 USD uptrend on the cusp of being broken. As is typical with a lack of news flows, technicals feature prominently today.
A move above 1.2120 in EUR-USD would break above the downward sloping trend line created by the lower highs in January and February. It would be mirrored in a similar break for Bloomberg's USD index.
The FOMC learnt a ton of valuable communication lessons between 2013 and 2018 and now knows that it has to handle the markets with kid gloves when it comes to major policy decisions. Guidance based on precise dates or data has given way to the vagaries of terms like "substantial progress", "maximum employment" and "average inflation target". Indeed, this prevents the Fed from painting itself into a corner by its communications and then having to spend time and effort jumping through hoops easing out of it.
The last Fed meeting on March 17 represented the first stage in the new communication cycle. Upgraded economic forecasts and a few dot increases allowed the Fed to signal the US was making its way out of the pandemic recession.
The April 27/28 meeting should be another baby step in the same direction. By reflecting economic progress and coupling that with Chair Powell's phrase of the economy being at an "inflexion point", the Fed can demonstrate its optimistic view.
Many in the market expect the Fed to drop the "substantial progress" line from the statement altogether. Applying verbal gymnastics to it runs the risk of making a statement. Dropping it is simple, and markets won't care.
But this adjustment sets the table for June's meeting, where the Fed could express that the economy has already recovered a lot of ground, is still recovering right now and is expected to continue to do so in the future. Everything is pointing in the right direction to lead into a September statement that unveils the taper.
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