Investors have been awaiting Joe Biden's decision on who will become the Fed chief for several days now. Will it be Powell as before or perhaps the more dovish Brainard? The market even had some faith that the world's most powerful central bank would be headed by a woman like the ECB. Biden chose Powell, and Lael Brainard became vice-chairman.
President Biden nominated Federal Reserve Chairman Jerome Powell for a second four-year term on the day, a sign that the central bank could continue its plans to tighten and maintain stability at the central bank. Lael Brainard, who was the other leading candidate and is seen as more dovish, will be vice-chair. The nominations now go to the Senate for confirmation and, although Powell's confirmation will likely be fluid. The Fed decided on Nov. 3 to begin reducing the monthly pace of net asset purchases by $10 billion for Treasury securities and $5 billion for mortgage-backed securities starting at the end of the month. Policymakers added that similar reductions in emergency pandemic support are likely to be appropriate each month, but they are prepared to adjust the pace of purchases if warranted by changes in the economic outlook.
As a consequence of Powell's endorsement, the US dollar may have reacted with strong appreciation, as it was Brainard who was supposed to be more dovish, so the market may have started to price in a greater chance of monetary policy tightening in the US. This seems to have happened as well. With the rising dollar, U.S. bond yields skyrocketed and thus stock prices or gold and silver quotations may have fallen, negative real interest rates may have declined. Moreover, the interest rate market estimates that in 2022. The Fed will raise rates three times. In June, in September, and in December. This is a very bold valuation, because the Fed itself in its macroeconomic projections, which will probably change, estimated the first hike only in 2023.
The EUR/USD pair was last seen trading at 1.12 in the summer of 2020, and investors in the options market seem to be increasing their bearish bias towards the EUR/USD rate. As Bloomberg reported, there were trades yesterday with options expiration price levels as high as 1.10. These are near the beginning of the outbreak hitting the financial markets.
The strong US dollar may have affected the quotations of gold and silver, which decreased significantly during yesterday's session, and today in the morning one ounce of gold costs slightly more than USD 1800, from USD 1870 a few days ago. Silver, on the other hand, has fallen from the area of $25.30 to $24.00. At present, it seems that the key for the dollar may be the upcoming data from the labour market and then the Fed's decision on monetary policy.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Forex service)
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