Gold price jumped on the back of the Fed's monetary policy, the dovish statement year-to-date. However, investors should take this with a pinch of salt and here it is why
The Forex markets had a volatile day yesterday and we can still feel the effects of the that today. The Federal Reserve decided to practice patience. This was very much anticipated by the market participants, so no shock there. But what wasn’t priced into the markets was that the Fed is going to remove the possibility of any interest rate hike for this year. The Fed took one step further by saying that there may be just one interest rate hike in 2020. This is bizarre.
It appears to me that the Fed has decided to listen to Donald Trump because the president criticized the Fed’s monetary policy several times before and asked them not to raise the interest rates.
Of course, for the Fed, it was easy to blame the economic data and use that as an excuse to justify their move. There is no doubt that there are some soft patches in the economic data, but not to this extent. They do warrant one interest rate hike for this year.
Nonetheless, investors should take the Fed’s decision with some pinch of salt because as we said yesterday, it would only take a couple of strong economic readings before we see the pressure building up again on them. The chairman can only use this excuse for so long, and if the economic data shows that the economy has safely sailed through these soft patches, the odds for an interest rate hike would jump substantially.
So overall, we do think that there are still chances for one rate hike for this year and we may hear this from the Fed in the coming months, perhaps towards the end of Q2 or the beginning of Q3.
Gold Should Have Crossed Above 1350
The bullish move in the gold price is mainly due to the weakness in the dollar. I do not believe that traders are buying the fact that there will be no interest rate hike this year. If that was the case, then we should have seen some serious moves in the gold price. We should have been able to break above the 1350 mark but we are still trading in this ugly range of 1295 to 1330. The momentum in the gold price doesn’t show that there is any serious strength.
Brexit Is a Self-inflicted Injury
As for Sterling, Theresa May is certainly living in a fool's paradise because she thinks that changing the wording of the current package is going to make things easier for her. We are not expecting any major decision from the EU today. We believe that it is likely that the EU is going to call another emergency meeting before they finally decide on Brexit extension.
If May puts the deal in the parliament next week, she would face the same fate as before. I think it is almost inevitable for a long-term extension to become a reality and the possibility of General Elections taking place are seriously high. Of course, one can never discount the fact that the UK can be crashing out of EU by accident. After all Brexit is a self-inflicted injury.
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