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Next week: when will the Fed start tapering?

Next week’s highlight will be on Wednesday, June 16, when two important events are scheduled to take place concurrently: Joe Biden's negotiations with Vladimir Putin in Geneva and the announcement of the Fed's interest rate decision. And while the outcome of the Russian-US negotiations is a wildcard, the Fed's decision is virtually a foregone conclusion: the target for the Fe Funds rate will remain unchanged at 0-0.25%.

So, on June 16, the FX market will first of all zero in on the accompanying press release of the Federal Open Market Committee and then on the press conference of Fed Chair Jerome Powell. The attention of market participants will be riveted on the remarks of Powell, who previously stated that there is no reason to wind down stimulus, to see if his script might become more hawkish. And the reason for this could be a record spike in annualized CPI in May, which reached 5%. The last time such a red-hot inflation print came out in the US was back in the summer of 2008, while service sector inflation jumped to 6.5% in May, a level not seen since the 1980s.

The opinions of American experts diverge on the timing of QE tapering, including those of FOMC members: some believe that this inflation spike is temporary and the accommodative policy should be kept in place, while others, such as hawkish-minded Robert Kaplan, President of the Federal Reserve Bank of Dallas (currently not a voting member), subscribe to the belief that the discussion on winding down QE should get under way immediately. The dynamics of the USD vis-à-vis global currencies, including the Russian ruble, will depend on both the Fed's narrative and the outcome of negotiations between the presidents of Russia and the United States on Wednesday and Thursday.

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