After a mixed session in Asia, Europe is seeing a mildly lower start, with most sitting on the sidelines ahead of the much-anticipated FOMC meeting later today.
Volumes are expected to be light across the session with few wanting to take aggressive bets ahead of what is shaping up to be one of the most eagerly awaited Fed meetings for a while.
This is the first FOMC meeting since inflation expectations really picked up, sending yields sharply higher. Fed Chair Powell finds himself in the unenviable position (not for the first time) of needing to walk a fine line between acknowledging the vaccine and stimulus-driven recovery without raising concerns of overheating and rate hikes.
Recent Fed chatter, particularly from Jerome Powell himself, has pointed to the Fed remaining accommodative. Growth and inflation forecasts are, however, expected to be revised higher. How the bond market reacts to those revisions and Jerome Powell’s tone is what will set the market’s direction for the coming weeks.
Are vaccine concerns easing?
The vaccine situation in Europe could start to turn a corner soon after European regulators confirmed the AstraZeneca jab benefits outweigh any concerns over blood clots in a preliminary report. Several leaders have signalled they are ready to lift the suspensions, but the question is whether the people are ready to take it. Low take-up of the AstraZeneca vaccine is a very real and likely consequence of the scaremongering in Europe surrounding the inoculation. This could hit Europe’s already very sluggish vaccine programme. With France teetering on the brink of another lockdown, this latest vaccine scepticism could hit the French economy hard.
European bourses have been relatively unaffected by the vaccine scandal and have actually outperformed the FTSE so far this month (keeping in mind the UK’s rapid vaccine programme). Instead, concerns over the sluggish vaccine rollout in Europe are being reflected in the euro, which has significantly underperformed against the pound across March.
FX – Will the Fed to sink the euro?
FX markets are eerily quiet ahead of the highly-anticipated FOMC meeting, with major pairs all trading within a narrow range. After three days of gains, the US dollar is pausing for breath.
The euro is clinging to 1.19 after being hit by the AstraZeneca vaccine row in recent sessions. Eurozone inflation data was shrugged off. CPI rose 0.2% MoM in February, in line with forecasts and January’s print. On an annual basis, core inflation dropped to 1.1%, down from 1.4% but in line with forecasts.
The euro is looking vulnerable ahead of the FOMC. A touch too much optimism from the Fed could be sufficient to send it tanking lower towards 1.18.
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