A sharp recovery in demand for company shares on Tuesday and the weakening of the dollar stopped. What can we expect today as the Fed announces its views on monetary policy and how it will affect the future?

After a sharp collapse in the markets on Monday, a rebound was expected on Tuesday, which was accompanied by an increase in demand for company shares and a weakening of the American currency. The media explained these dynamics on Monday by the fact that investors were clearly closing long positions in shares and buying the dollar in anticipation of corporate reports of companies, which this week will be significantly saturated. On Tuesday, the growth in demand for risky assets and the weakening of the dollar was interpreted as a result of a good start in the publication of financial statements.

In my opinion, everything is not so simple. On the one hand, investors have really turned their attention to companies’ reporting and this affects the demand for shares, but, on the other hand, I believe that not only this factor affects the dynamics of the markets, but also a number of other reasons.

As I previously indicated, there is a high likelihood that the Fed will begin to reduce the volume of government bond buybacks later this year in the wake of the expected recovery of the American and global economies. The recently published economic statistics are likely to indicate the formation of a negative bottom in the economy, from which it will push off and begin to vigorously recover in the spring of this year. In this case, the American regulator can make it clear at the end of today’s meeting that it will closely monitor this process, although in general, it will retain its rhetoric regarding a soft monetary exchange rate and a promising, low level of interest rates. But this will be a signal for the market, which can push up the growth of Treasury yields, and this will be an important supporting factor for the dollar rate.

On the other hand, these hints on the wave of expectations of a dynamic recovery of the American economy may prompt Congress, if not to talk about the new support measures from Joe Biden in the amount of $ 1.9 trillion, then significantly reduce the amount of aid. This will be a strong negative signal for investors who previously actively bet on this factor when buying shares in companies. Such prospects may serve as a reason for a local correction in stock markets and an increase in the dollar in the future.

What to expect soon:

Concerning today’s possible dynamics in the markets, I do not expect any significant changes, unless, of course, the Fed and its leader Jerome Powell say something out of hand. Most likely, the local decline in shares, which began on Monday, will resume, which will be accompanied by the growth of the American currency

By Maksim FXbro