Suddenly, the US Dollar Index fell 6.70% over the last two weeks, marking the biggest decrease in the currency since 2020.
Fed Pretends to Control the Market
Information is not investment advice
On May 4, the US Federal Reserve revealed the federal funds rate for the next two months. Even though a 50 basis points hike was widely expected, the future is not so clear. Let’s figure it out bit by bit!
FOMC statement in a nutshell
It’s better to start with a retrospective outlook on the funds rate. Since the Covid-19 began, the Fed kept the rates near 0.00% to boost the economy and decrease the negative impact of supply shortages, lockdowns, and slumps in retail sales. You can see a sharp decrease in rates in the figure below.
Low rates, $8 trillion printed over two years, and the slow down of the pandemic created a perfect field for inflation to rise. Now, it’s at a 40-year high, and the time has come for strict monetary tightening.
What could go wrong? Well, the war in Ukraine started and caused even more supply shortages. Now, the prices for oil and wheat are rising, so inflation is not likely to end anytime soon. The prices will keep increasing, but here’s the good news. Inflation has probably peaked, and the 8.5% CPI is likely to be the highest point we will see in the next several years. At least, the economy looks this way.
The Fed thinks the same. The Fed stated that inflation has peaked and will decrease over time in their report. Before the FOMC statement came out, the market expected a 50 basis point hike in May and a 75 basis point hike in July 2022. In the statement, Fed chair Jerome Powell said the Fed has no reason to hike rates so aggressively. Thus, the next rate hike will likely be not 75, but 50 basis points increase, which is positive for every risk asset like stocks or crypto.
Stocks’ biggest gain since March
US500 (S&P500) gained almost 3% after the FOMC statement. It’s not a change of the downtrend – the stock market is still under heavy pressure, and there are few positive factors. There is an investment strategy for stocks based on seasonal demand called “Sell in May and go away.” In theory, the period from November to April has significantly stronger stock market growth on average than the other months. Positive news from the Fed will boost the index higher, but not for long.
As for the chart, the US500 formed a daily reversal candle on May 2. Also, we see a bounce from the RSI oscillator. Currently, we are at a crossroad, so watch closely after the support of 4000 and resistance of 4370. We bet there will be a volatile move in the direction of the breakout.
US500 daily chart
Resistance: 4300, 4370, 4640, 4800-4850
Support: 4140, 4000
Gold and USD outlook
As we stated at the beginning of the article, inflation is here to stay. Most of the time, it’s a bullish factor for the gold price because even with shrinking inflation, prices will keep rising. Thus, the greenback will feel weaker for months, if not years.
Still, we wait for the gold to touch the $1840 support line and hold in this area. This is a trendline that worked for gold for more than two years. Thus, gold must consolidate for some time near this area and then skyrocket with targets at $2000, $2500, and higher. In the worst scenario, gold may fall below the trendline, and the bearish trend will start.
XAUUSD daily chart
Resistance: 1910, 1940, 2000, 2070, 2100
Support: 1870, 1840, 1750
On the contrary, the DXY (the US dollar index) is at the strongest resistance in five years. Thus, we expect a massive reversal from the 104.00 resistance line, another positive factor for gold.
US Dollar weekly chart
Support: 100.00, 97.00, 95.00
Use this information in your favor!
Many investors treated gold as a protection against inflation. However, last week, gold lost its major support and dropped despite rising inflation. Why did it act like this?
US dollar gains ahead of the US CPI data on July 13th, pressing gold to new lows!
On Thursday, the 2nd of February, the Bank of England will publish its report concerning interest rates and inflation data for the Eurozone. Professionals and investors anticipate that Andrew Bailey’s lead team of policy makers will likely raise interest rates to 4%; the highest in over a decade, for the tenth time in a row.
The first FOMC meeting comes after a buildup of anticipation from traders and investors alike, as the markets await what posture the Fed will take regarding the interest rates; would there be a hike or a cut in interest rates? Recall that the Federal Open Market Committee had previously ended the year 2022 with a 50bps hike, and an indication from Powell, the committee chairman, that the Fed could consider raising interest rates by 75bps in the course of the year 2023.
Western countries are trying to find other options for oil and gas supplies after a 10th package of sanctions, which will put more pressure on Russian oil and decrease global oil supply. Italy, for example, is in talks with Libya.