Caution ahead of Fed minutes

A day of caution in the markets, with Europe a mixed bag and the US opening marginally lower as we await FOMC minutes later in the session.

Given how much Fed commentary we’ve had over the last couple of weeks, I struggle to see the minutes offering much of value for the markets. Even the most dovish members of the Fed have come around to the idea of tapering this year, with Neel Kashkari even accepting it’s coming either the end of this year or early next.

If that’s the extreme view then a September announcement looks almost nailed on. The only thing that could stand in its way would be a surge in Covid cases and restrictions weighing on activity in the coming months, leading to a sluggish recovery, as Kashkari warned.

But given the strength of the data, barring occasional blips, that’s unlikely to happen in time for the September meeting. The Jackson Hole meeting next week is what everyone is more concerned with now though. There was no reference to monetary policy during Jerome Powell’s online Town Hall event on Tuesday, with the Chairman saving those for next week when all eyes are on him.

UK inflation decline changes nothing

The UK inflation data fell short of expectations on Wednesday, rising only 2% y/y, compared with forecasts of 2.3% and down from 2.5%. Despite what the headline number suggests, this is not a sign of price pressures in the UK normalising, rather a temporary blip that will reverse course in the coming months.

The primary cause of the drop was base effects, with July last year seeing a spike in inflation as the economy reopened. Inflationary pressures are expected to build in the months ahead which the MPC will likely overlook due to the transitory nature of them.

There hasn’t been much of a response to the data this morning, despite the significant miss; a sign that traders don’t view this as a substantial or sustainable shift that will have any influence on interest rates.

Bitcoin could see larger correction

Bitcoin is making small gains today after finding some support around USD 44,000. This is roughly a 38.2% retracement of the August lows and highs and falls around the mid-August lows which could make it a key area of support once more. A move below here could signal a sharper correction, with USD 42,500 and USD 41,000 key below.

The medium-term outlook still looks promising for bitcoin but the near-term could see profit-taking continue and major prior resistance levels re-tested from above.

For a look at all of today’s economic events, check out our economic calendar. www.marketpulse.com/economic-events/

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