Yesterday, the market reaction to the Fed decision was quite unambiguous. The dollar weakened, the EUR/USD exchange rate jumped to 1.1980, US stock indices rose and gold rose to USD 1750. But will the markets be able to maintain such good moods for a longer time?
During the March meeting, the Fed left the target range for the federal funds rate unchanged at 0-0.25 percent and signaled a high probability of no hikes until 2023. Policymakers noted that indicators of economic activity and employment have risen recently, although the sectors most affected by the pandemic remain weak. The central bank raised its GDP forecasts for 2021 and 2022 due to President Joe Biden's approval of a $1.9 trillion aid package and the ongoing COVID-19 vaccination program. The world's largest economy is expected to grow 6.5 percent this year (vs. 4.2 percent projected in December) and 3.3 percent in 2022. (vs. 3.2 percent). The PCE price index is expected to rise 2.4 percent in 2021 (vs. 1.8 percent) and by 2.0 percent in 2022. (vs. 1.9 percent). As for the labor market, the unemployment rate is expected to be 4.5 percent this year (vs. 5.0 percent) and 3.9 percent in 2022 (vs. 4.2 percent).
With its projections, the Fed appears to have beaten down expectations for interest rate hikes in 2022, but in turn has not taken a stance on 10-year or 30-year bond yields. As a result, since the morning hours today we could observe further sell-off in the US debt market and a rise in 10-year bond yields above 1.7 percent. This in turn could have subdued investor sentiment and US index futures started to turn back from record levels. Nonetheless, apart from the temporary turbulence, it seems that forecasts of strong economic growth at record low interest rates may continue to favor stock market bulls.
Meanwhile, the situation on the gold market looks interesting. This metal, despite the further decline in bond prices, has not set a new low. Since gold rose above USD 1700, which took place at the beginning of the second week of March, the price is still above this level, and yesterday even the level of USD 1750 was reached. If gold continues to resist the rise in yields, in the event of their retreat, the chances for gold prices to rise seem relatively high. It is worth recalling that the price of the yellow metal is correcting an earlier pandemic rally that ended last summer. At that time, the price per ounce was over USD 2050. With the current correction, the price has settled below USD 1700. However, the good times for gold may yet return if the correction comes to an end in the near future.
From the important events, today we will learn the Bank of England's decision on interest rates. It is expected to remain at a record low of 0.1 percent and the size of the bond-buying program unchanged at £875 billion. The economic outlook appears to have improved since last month as the UK economy reopens after the nationwide shutdown, vaccines continue to be introduced and more than a third of the UK population has already received them, and more fiscal support has been announced, including an extension of workers' paychecks. Investors will continue to look for clues about the central bank's view on the recent rise in bond yields, although BOE Governor Andrew Bailey highlighted it as a sign of economic optimism.
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.
76.44% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Trade this news from Conotoxia Ltd. platforms
Go to your account
