The expectation of a change in the Fed's monetary course still hovers over the currency markets. This is a really important event that will begin to close the course of super-soft monetary policy, which was caused by the coronavirus pandemic that broke out last spring.
Currently, investors are afraid of the realization that the money rain of dollar liquidity will begin to disappear, and at the same time, the stock markets will stop falling further, breaking away from the reality of the current specific state of the US economy in particular, and the world as a whole.
The publication of the minutes of the Fed's July meeting and the subsequent comments from some bank members this week indicate that the era of easy money is beginning to go down in history. If the regulator raised the topic of the need to curtail stimulus measures even in the conditions of high inflation of 5.4% at the time of the Fed meeting and a weak labor market, then the bank will have more reasons to curtail incentives after the release of the latest strong data from the labor market and consumer inflation, which began to show a monthly slowdown.
How does this threaten the markets?
In our opinion, stock investors, after the passions around the Fed's reversal from a soft monetary course to a hard one, will begin to receive more demand for shares of growth companies, which will receive support in the wake of the continued growth of the American economy. First of all, this applies to stocks included in the DOW and S&P indices. The NASDAQ technology index is unlikely to outperform them due to a drop in demand for shares of companies that were noticeably in demand during the COVID-19 pandemic and a massive influx of dollar liquidity in the financial system.
The US dollar will be in demand, but it is unlikely to be noticeable, or rather, strong growth against a basket of major currencies. We believe that after some time, other major and not-so-global banks, starting with the ECB, will begin to change financial conditions following the Fed. They will simply be forced to do this because of the increasing flow of money to the States.
In the short term, gold is likely to be in demand, on the one hand, as a safe haven asset in the unstable geopolitical situation in the world, and on the other, as the only and irreplaceable asset in the conditions of economic and COVID-19 problems in the world.
Meanwhile, crude oil prices are unlikely to get a further reason for strong growth. A reduction in dollar liquidity will stimulate demand for the dollar. Its local strengthening and the geopolitical crisis in the Middle East will weigh down the prices of" black gold" temporarily, but a possible reduction in the volume of its production in the future will allow prices to rise again to recent summer highs.
In the meantime, the markets await high volatility probably before J. Powell's speech at the Jackson Hole symposium on August 27.
Forecast of the day:
The GBP/USD pair is under pressure amid the US dollar's general strengthening and the publication of weak UK retail sales data. If the pair falls below the level of 1.3600, it will continue falling to 1.3510.
The AUD/USD pair continues to decline. Once it falls to the first target of 0.7125, it can decline to the second target of 0.7015.