Will the Fed put take the baton from the reflation narrative to round off January trading?

Author: Justin Low | Category: News

The market has been caught in a push and pull as of late

The dollar was among the weakest performers in trading last week but is showing glimpses of turning that around so far over the past two days.For bank trade ideas, check out eFX Plus

There are a couple of key narratives at play so far to start the new week and the market has to weigh them all up, following the pause in the reflation narrative.

The big one is of course US stimulus as doubts are starting to creep in that Democrats may not have what it takes to push for that any time soon - at least not smoothly.

That definitely has tempered with some of the enthusiasm since the Georgia runoffs and Biden's big speech, with sentiment clearly reflected by the bond market yesterday:

USGG10YR
While 10-year Treasury yields slumped after its recent consolidation, a drop below 1% may not hold too long. But on the flipside, any quick resurgence back towards 1.20% or above isn't likely to follow any time soon either.

And when you consider Powell's remarks from two weeks ago, which he is likely to repeat tomorrow alongside the Fed statement, then there's not much of a hurry for bond traders to head to the exits and sell in a big way.

The virus/vaccine narrative is also part of the consideration right now as the market has to work out the timeline in which things will start to turn around across the globe.

There has been some tempering to the vaccine optimism - with delays seen in Europe and questions surrounding the efficacy of some vaccines - adding to the many unknown variants of the virus now spreading in many parts of the world.

That certainly does warrant some consideration for a breather and a rethink that things will get back to 'normal' by the summer - at least for the time being.

That said, when the vaccine rollout starts to reach a certain critical phase of being distributed to the masses, expect the shift in gears to be a quick one.

Adding to those considerations will be how much emphasis does the Fed want to put (no pun intended) in telling the market that they won't be considering a change in policy stance any time soon.

In that lieu, I reckon we won't hear anything different from Powell's remarks two weeks ago but it does serve as a timely reminder to the market that easy money and the abundance of liquidity is here to stay for quite some time yet.

The reflation narrative has dominated the market landscape so far to kick things off in 2021 but quietly in the background, the Fed put continues to play out.

Perhaps, it is time now that it takes the baton and lead the charge to round off January trading and as we navigate through the rest of Q1.

But again, it isn't quite anything new that we don't already know since last year.

One can also argue that we are overdue a correction since the November rally until now, so be sure to keep an eye on the technicals as well for clues about market sentiment.

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