It was certainly an exciting week thanks to central banks, because we have observed bigger changes on all asset classes. Both on the foreign exchange market, precious metals, crude oil and shares. Central banks and their decisions as well as announcements of further steps have a very wide range of impact.
Weakening of the US dollar, records on the American stock exchange, gold most expensive for almost 6 years – these are just a few examples of significant changes on financial markets this week, which could have been contributed by a very dovish attitude of the two largest central banks – US Federal Reserve and European Bank central. The dovish tone was started by Mario Draghi, who announced that if the economic situation in the euro zone does not improve, it will be possible to launch another stimulus program.
In turn, the FED, in line with investors' expectations, has opened the way to cutting interest rates in the coming months. The changes in interest rates are supposed to justify an increase in uncertainty regarding the outlook for the economy. This in turn is the consequence of a trade war led by President Donald Trump. At present, the interest rate market is assessing the chances of interest rate cuts by the FED in July at 100%. Of which 72 percent odds points to a cut of 25 basis points, and 28 percent for a cut of 50 basis points. Much will now depend on the meeting of the Chinese and US presidents at the G20 summit in Japan, where the leaders will discuss the trade agreement.
Nevertheless, very dovish statements from the two largest central banks in the world and hope for another cheap money meant that investors came to the mode - buy everything. The US S&P 500 index set a new record of all time after seven weeks. Gold went up to USD 1411, which means the highest level since 2013, and the decline of the American currency was also favorable for the price increase.
As expected, the only central bank, whose attitude is more hawkish, is the Bank of Norway. Norges Bank raised its main interest rate to 1.25 percent this week. NB also announced a possible next hike later this year. As a result, the Norwegian krone NOK definitely strengthened.
However, investors will have to return to other topics after statements from central banks. One of them is the increase in tension between US and Iran, where even more is said about a possible armed conflict that may affect the oil market. Another topic is the talks between the Chinese and US presidents regarding the trade war.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
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