A new rate hike will likely drive weakness in stocks and further strength in an already surging US Dollar
Global stock markets rose on Tuesday while 10-year US Treasury yields retreated from the 3% level as investors remained cautious, expecting the Federal Reserve to hike the interest rates. Also, the announcement of the beginning of the balance sheet reduction with more than $9 trillion in corporate and treasury bonds was touted.
The Fed will take steps to fight inflation, as data showed. In March, U.S. job vacancies hit a record high as labor shortages persisted, suggesting employers may need to raise wages.
The central bank of the United States raised its official interest rate by 25 basis points in March, and the expectation for today is to do so by 50 bps. However, at some point, some Fed members pointed to the possibility of an increase of 75 bps, precipitating bond prices and driving up interest rates. A half-point hike would be the biggest rate hike at a Fed meeting in decades. What will be at the center of investors' attention will be Chairman Powell's statements manifesting Fed’s determination toward a more restrictive monetary policy.
The prevailing opinion in the market is that they will remain firm, regardless of the risks of a deep economic slowdown, and will point to aggressive rate hikes as necessary to beat inflation. Any suggestion of a more dovish bias would be interpreted positively by the stock markets and would lead to a general weakening of the US Dollar. The currency has seen extraordinary upward momentum after interest rate hikes.
One of the assets that have experienced the most volatility in recent days and that is highly dependent on what the Fed decides, and the evolution of the US Dollar is Gold.
Gold might be pressured downwards if the Fed decides to maintain its more "hawkish" tone. If contrary to the most widespread opinion of the market, the Fed will be backing down and showing somewhat a more "dovish" stance, Gold would regain upward momentum.
Technically, Gold is at levels close to support zones. The first one, the $1862/ounce level (the 200-day moving average and below), which is also the last Fibonacci retracement, indicates a range trading level under which further losses might open the path to the area below $1800.
Sources: Bloomberg, Reuters
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