A relatively boring week in the markets draws to a close, offering us an opportunity to step back and look at higher time frames. The Dollar currency index currently sits at around the 105 level. With the exception of a few months last year, we would have to go back to 2002 to see such strength in the greenback. To see the same 5.5% interest rate target set by the Fed, we would have to go back to 2001. As for bonds, we would have to go back to 2007 to see the kind of yields we are currently flirting with.
The Federal Reserve’s remit is clear: use the monetary powers at its disposal to target a 2% inflation rate, a figure shared by many countries around the world. The latest data available suggest inflation in the US is just under double that target, at 3.7%. The effect of interest rates and bond transactions is by no means immediate however; any change in Fed policy can take months to materialise on the ground, although stock markets need not wait so long.
It then becomes a question of timing and repositioning. Any potential pivot by the Fed remains a major catalyst to shift market sentiment. Traders await with bated breath for a sign of monetary easing and the flood of liquidity it will provide. Until then we remain at the mercy of much shorter term market drivers.
