The week ahead: How eager the Fed is to taper bond purchases?

The main story this week was the strong run higher in US 10 year bond yields. This led to a rise in the USD and excited expectations of a faster than expected US recovery. One of the key questions at the moment is whether the recent USD retracement is part of a wider trend change or just a pull back in the broader USD bear market. In answering that question some key areas to watch going forward will be the pace of the US vaccination program, the rate of inflation, and how eager the Fed is to taper bond purchases. Expect the USD to be centre stage next week.

Other key events from the past week

GBP: Bailey talks rates, Jan 11. The GBP gained on comments that Bank of England’s Governor Bailey considered negative interest rates a ‘controversial is-sue’. This strengthened the GBP this week as traders priced out negative rates.

USD: US10 year bonds, Jan 11. US10 year bond yields broke higher pulling the Dollar Index up with it. The 89.00 level is key support for the Dollar Index. If that holds next week then a break of 91.00 leaves 93.00 the next target for buyers.

US Oil: Recovery hopes boost oil, Jan 12. WTI crude futures continued higher after Saudi Arabia’s 1mln bpd production cut last week. The positive outlook for US crude buyers revolves around global COVID-19 vaccine hopes.

Key events for the coming week

CAD: Interest Rate Statement, Jan 20. Canada’s oil export economy has been supported by rising oil prices. Will the Bank of Canada adopt a more optimistic outlook at next week’s rate meeting?

JPY: Interest Rate Statement, Jan 21. The Bank of Japan will meet next week and rates as well as bond purchase are largely expected to remain unchanged. However, OiS futures market do project 81% chance of a 10bps hike next week.

S&P500: Buy the rumour, sell the fact? Jan 22. Will the S&P500 drop lower on a ‘buy the rumour sell the fact response’ when the long anticipated US stimulus bill is finally announced?

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