US and European futures are trading lower as the stock market broke its five-day rally yesterday. Stock traders are playing safe, and they want to book some profit given the stellar rally we have seen for the past number of days. In addition to this, traders are not sure how many more interest rate hikes will take place in the US as the Fed Chairman gave his most hawkish speech since the beginning of the covid pandemic. All traders know now is that the Fed is ready to do whatever it takes to bring inflation down, which has raised alarms among traders. Bitcoin and gold prices have started to rise as traders do not believe that the Fed can easily control inflation. They are more likely to make a policy mistake by adopting a highly aggressive monetary policy stance.
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Fed Chairman Jerome Powell has made it clear that the Fed is not messing around this time; they want to control inflation at any cost. In his speech yesterday, Chairman Powell vowed that the Fed is ready to make more challenging choices to bring inflation under control. If they don’t bring inflation under control, it poses a significant threat to strong economic recovery in the US. The speech came in less than one week after the Fed’s monetary policy decision, and the fact that the Fed’s tone is highly aggressive means that the Fed had decent time to assess their activities, and now they are ready to double down on it. The fact is that the inflation reading in the US is at a level that has not been seen in nearly 40 years. It is essential for the Fed now to bring those numbers down.
The big question for traders and investors is how aggressive the Fed will be concerning their monetary policy. So far, market players have been pricing in six more interest rate hikes, and each one of them is to be 25 basis points. However, Powell’s speech last night has changed things dramatically and created immense confusion. The reality that the Fed is ready to do anything at any cost means that traders should not expect that the Fed will be increasing the interest by only 25 basis points. The next rate hike could be 50 basis points, and this is a scenario that could be priced in the market. We now have no clarity on how many more interest rate hikes we will see this year and at what meeting how much interest rate hike will take place.
Market players have started to price a 50 basis points interest rate hike during the Fed’s next meeting. The Fed Chairman has made it clear that the Fed will take all the necessary steps to bring inflation to its more stable levels.
The previous metal, which usually falls when the Fed increases the interest rate, didn’t move much yesterday. Gold prices are very stable and in positive territory today, and there are two reasons behind it. Firstly, gold is used as a hedge against inflation, and the fact that the Fed is so worried about inflation, traders believe that they must have gold in their portfolios. Secondly, the current stance adopted by the Fed and the members of the Fed is extremely hawkish. This has raised alarms among some traders that Fed is likely to make another policy mistake as they want to control inflation at any cost. Controlling inflation aggressively is something that we have not seen in 40 years, and times have changed dramatically between then and now.
Another important reason we are still seeing more shine for the yellow metal is the ongoing geological tension between Russia and Ukraine. It doesn’t seem that there will be some peaceful resolution to the current situation, and it is more than likely that Russia will increase its attack on Ukraine in the coming days.
The crypto king, Bitcoin, has finally woken up now, and today we have seen price spiking. Like gold, bitcoin is also considered a hedge against inflation, especially since supply is limited in terms of Bitcoin. On the fundamental side, investors are waiting for a decision by the SEC to approve its first spot bitcoin ETF. Yesterday, the agency said it would extend its window to decide on WisdomTree’s Bitcoin investment vehicle. Having approval on spot Bitcoin ETF will change the game for bitcoin, and the truth that the SEC hasn’t rejected the decision this time has increased the odds for a more positive news time.
As for the technical price levels, traders are likely to watch the Bitcoin price very closely as it begins its journey towards its significant resistance of 50K. Only once the bitcoin price breaks above this key resistance level can we say that the price narrative has dramatically changed now, and the odds favour higher highs and higher lows. Until then, bearish sentiment is likely to prevail.
We do not have much on the economic docket regarding economic data, but several prominent central bank officials are giving speeches. Firstly, we have ECB President Christine Lagarde making her speech, and her remarks will be closely watched as the bank is under pressure now to begin hiking the interest rate. Following that, we have several Fed members taking the stage and giving their thoughts about the current monetary policy. Their stance will provide traders more clarity if the Fed increases the interest rate by 50 or 25 basis points during their next meeting.