As the central bank works to rein in rising inflation, investors are becoming more concerned that it may cause the economy to enter a recession due to its actions. During the month that has traditionally been the most difficult for stock investors, the hawkish policy is making investors feel pessimistic. Individual investors’ degree of pessimism reached its most significant level in more than a decade as negative sentiment, or the anticipation that stock prices would decline over the next six months touched 60.9%. This was the highest level of pessimism seen in more than a decade.
The Federal Reserve has continued its aggressive attitude, increasing short-term interest rates by another 75 basis points and predicting they may reach as high as 4.4% by the end of 2022. Other central banks across the globe followed the pattern set by the Fed. They implemented their significant rises overnight, despite the fact that these hikes might adversely affect the economy.
At the end of trading on Thursday, all major averages were headed toward finishing the week with losses. The Dow is trading at a loss of around 2.42%, while the S&P and Nasdaq have seen losses of 2.98% and 3.33%, respectively. On Thursday, the S&P and Dow finished 2.5% and 0.5% above their respective previous lows for the day.
The Standard & Poor’s 500 Index lost 0.1% of its value during trading and reached its lowest level since the middle of July. The Nasdaq Composite had a loss of 0.46 per cent. A gain of 105 points for the Dow Jones Industrial Average was seen in trading just before the closing bell. The 30-stock index came close to making gains during the day but remained in the red most of the trading session.
On Thursday, the Bank of England agreed to raise its base rate from 1.75 per cent to 2.25 per cent, a change that was less than the rise of 0.75 percentage points that many market participants had anticipated. Five members of its Monetary Policy Committee voted in favour of a hike of 0.5 percentage points. In comparison, just three members voted in favour of a bigger increase of 0.75 percentage points, which was something that many people had anticipated. There was one member who supported an increase of 0.25 percentage points.
Although it fell slightly in August, inflation in the United Kingdom remained far higher than the bank’s objective of 2%, coming in at 9.9% year-on-year. The Bank of England (BOE) now forecasts inflation to peak at just under 11% in October, a decrease from their earlier projection of 13%.
According to the Monetary Policy Committee (MPC), the energy relief plan proposed by the incoming Prime Minister, Liz Truss, may prevent a severe economic downturn. The MPC observed that the help would increase demand, which will have consequences for inflation, and details of that plan, as well as tax cuts and other measures, are scheduled to be disclosed on Friday.
The committee said it would “act strongly as required” if it seemed that price pressures would remain for a more extended period, which reinforced the notion that the process of tightening monetary policy was not yet complete. This, in conjunction with the drive from certain authorities for a shift of three-quarters of a point, may lay the groundwork for a more significant increase later this year.
This week, the pound’s value fell to new multidecade lows versus the dollar, trading at less than $1.14 through Wednesday and falling further to less than $1.13 early Thursday. It has seen a dramatic depreciation against the US dollar this year, and the last time it was at this level was in 1985.
Spot prices are down 8.6 per cent this year owing to the Fed’s rate hikes, and investor holdings of exchange-traded funds (a crucial component in driving gold prices to all-time highs in 2020) have been declining for four months in a row as of August. This is a significant factor in pushing gold prices to all-time highs in 2020.
As long as the Fed continues on its path of hawkish monetary policy by raising the interest rate, and gold ETFs show that more investors are liquidating their positions, the path of the least resistance for gold prices is likely to remain skewed to the downside.
In addition, the cycle of monetary tightening by the Federal Reserve surpasses that of other central banks, such as the Bank of Japan and the European Central Bank, which helps to support the value of the US dollar. This is another crucial factor that is reducing the gold’s appeal.