It appears that the ongoing corrective strengthening of the U.S. dollar may be discounting improvements in the U.S. economy, as well as the fiscal, monetary, and infrastructure stimulus plan, which may reduce the chances of further appreciation.
U.S. President Joe Biden on Wednesday announced a $2.25 trillion infrastructure plan that will be implemented over an eight-year period. This plan will allocate $621 billion to transportation, $580 billion to manufacturing and $400 billion to care for the elderly and disabled. To fund the plan, Biden has proposed raising the corporate income tax from 21 percent to 28 percent and increasing taxes on foreign corporate profits. However, the package is likely to face strong opposition from politicians, especially on the tax increase issue. The second part of the stimulus plan, on health care and child care, is expected to be unveiled in a few weeks.
Due to the duration of the program, however, this one may have a moderate impact on the financial markets, which have already managed to price the US economic recovery to some extent, as we may observe from the still high US bond yields and the very steep yield curve. This, in turn, may continue to keep US indices at or near record levels, and may also favor a strong dollar.
However, it seems that the USD strengthening we have seen for three months of 2021 may be slowly coming to an end, and the EUR/USD major currency pair may defend support in the 1.16-1.17 area. This in turn could have its broad implications for both emerging market currencies and the gold or silver markets. In the gold market, the correction continues from the level above $2,000 seen in August 2020 to now and the area around $1,680. In the gold market, however, the correction may be over and the next quarter could see a rebound in prices.
Meanwhile, in the silver market, the correction seems to have continued from the February high of $30 to the currently observed $24. Here, as on the gold market, it seems that the second quarter could be more favorable for silver. All this may depend, however, on USD quotations and the level of US bond yields.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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