Better scope for a hawkish surprise from the Fed than ECB, stronger USD is on the cards – Nordea

Interesting tapering decisions are upcoming from both the Federal Reserve and the European Central Bank. Economists at Nordea find that the scope for an aggressive wind-down of purchases is bigger for the Fed than the ECB and hence see a stronger USD on the cards.

How will markets cope with tapering?

“Jay Powell and the Fed finally admitted to talking about tapering at the June meeting, and it looks fairly likely that we will get a decision already at the meeting in September, potentially with several taper pre-warnings during July and August. Usually, the Fed would utilize the Jackson Hole conference in late August to provide a fairly firm clue about the upcoming tapering process. This is likely to be the case again this time.”

“We see the net purchases for the PEPP ending in March 2022, and expect the ECB to decide on lowering the pace of bond purchases at the September meeting. The pace of purchases is set to fall already in August, but mainly due to seasonality considerations, as bond issuance volumes traditionally fall in August. We expect the ECB to expand the Asset Purchase Programme (APP), when the PEPP ends, but the end result would still be a considerably lower pace of buying compared to the current situation.”

“We keep a 1.15-1.16 target intact for EUR/USD already this year, while we see risks of higher EUR/SEK readings over summer but with a better performance in NOK. We find that the USD strength will be broad-based (typical during a tapering process), also against important peers such as CNY and JPY. The GBP is on the other hand close to reaching peak positivity after the swifter than anticipated vaccination plan and the semi-surprising Brexit deal from just before New Year.”