the U.S Dollar has a strong inverted correlation with headline inflation in terms of a year over year percentage change. as we see in the chart below the daily trade weighted U.S Dollar starts retracing upward as inflation is highly expected to decelerate in the coming quarter.

inflation and the dollar  fred

As the fed Chair J. POWELL sends signals of sooner tapering, the debate starts among FOMC members, policymakers, and speculators on how the tapering path and speed will look like.

The likely scenario is a slow and smooth reduction of the Fed’s $120 billion in monthly bond purchases rather than one-shot end of the program.

in addition, the recent dot plot figure showed in the last FOMC economic projection, sends hints of a likely rate hike by around mid 2022 as more FOMC members are likely to join the HWKS. the 30 day federal funds futures contract of July 2022 has sharply moved, anticipating at least 25 basis points rise in interest rates. yields on the short end of the bond market has risen as well in response to the federal reserve expected move.

in contrast, long term bond yields declined, and are expected to decline further, in response to the expected slowdown and downward correction in economic indicators as the base effect headwind make them retracing back from sharp rates of increases made since the second half of 2020 pushed by huge stimulus bills and money printing.

for this week, some signs of momentum slowdown are expected to be seen on Markit PMI data released on Wednesday which expected to come slightly below previous month, signaling a slowdown in growth momentum and the speed by which the stock market would make new all time highs.