New Premium Trade & Pressure Lifts on the Fed

Markets in July have been consumed with escalating worries (not necessarily selloffs): 1) China 2) Delta variant 3) Equity earnings 4) Leverage. Inflation worries, however, have eased, albeit temporarily. Yet, falling Treasury yields and the sense that we've passed the peak of bottlenecks have proven to be a relief for the market.

So how do we incorporate the Fed's media blackout, with easing inflation concerns?

The best central banks are the ones that keep off the front pages, and Powell's goal today is strive for as little attention as possible. None of the questions the Fed is asking have been answered and pressure on them to act is low. The path forward here is to acknowledge risks around covid and inflation while emphasizing that the Fed is in no rush. The market will again want to hear there's significant work to do on employment and that any policy changes will be foreshadowed well in advance.

The dollar selloff on Tuesday was likely a shift in positions in expectation of a dovish Fed. Do not forget month-end adjustments over the next 2 days. 

The risk is that Powell frets about inflation or puts a taper back on the table.  That's not likely but it's what to watch for. Ashraf raised the possibility of the Fed mentioning the Delta varian in the policy statement. If it happens, expect USD selling and a push-up in gold and silver.