The Federal Reserve dialled up the volume on a number of economic forecasts yesterday. It was evident that the Fed is feeling confident and more optimistic about the economic recovery and the market rallied on the back of this. The Fed has increased its GDP forecast for 2021, and expects the unemployment rate to fall to 6.7%, which is positive for economic sentiment. However, despite all of this optimism, the Fed sent one clear signal to the market, and that is that it is not going to slow down on its asset purchase programme. The Fed Chairman, Jerome Powell, made it crystal clear that the Fed cannot afford to take any risks. The message was that being optimistic about the economy is one thing, and being vigilant or overconfident is something different. Dialling back on the asset purchase programme or on the dovish monetary policy can hurt the economy, as traders will take that as a hawkish sign. And the Fed cannot afford to jeopardise this relation.
For gold prices, yesterday was a volatile day because, on the one hand, the Fed was saying that we are optimistic about the coronavirus vaccine, but on the other hand, the message was that we are not going to increase the interest rate any time soon. So, this sent some shock waves through the dollar index, which in turn moved the gold price. But listening to the Fed’s view, it is pretty clear now that gold prices are likely to continue to move higher as the Fed is in no rush at all to do anything anytime soon. Traders know that the Fed will give plenty of warning before it starts the tapering process, so for now, the path of least resistance in terms of the gold price is skewed to the upside.
Another factor that we need to keep in mind when it comes to gold prices is that the consumer spending data released yesterday confirmed that there is a significant weakness. Yes, the Covid vaccine will reignite the economic recovery process, but it will take some time for the economic recovery to occur.
On the stimulus front, Democrats and Republicans are saying that further progress has been made on stimulus talk. Market players are optimistic about this, and they know that lawmakers will have to support the economy; otherwise, there could be a huge disaster for the economy. That is because the recent Covid restrictions have drawn more blood out of the fragile economic recovery. Smaller to medium-sized businesses are really struggling, and without any help, it is highly likely that they will face bankruptcies.
In the currency market, we see consistent strength for the Sterling-dollar pair. Traders are optimistic about Brexit’s agreement with the EU. The fact that the UK has signed a custom trade agreement with the US further assures investors that even if there is no-trade deal Brexit, the UK’s government will be swift in finalising separate trade deals. Overall, the fear of a deal-Brexit has started to subside, favoring the sterling price. Having said that, it is important to keep in mind the Covid crisis has done serious damage to the economy. We have clear evidence of banks moving their assets and employees out of London, and this scar isn’t going to heal that easily. So a Brexit deal will only provide temporary relief.
The crypto king made another all-time high yesterday and crossed the 20K price level for the first time, which made investors talking about the digital asset once again. What was expected in the market was that the moment the crypto king breaks the 20K mark, it would be a quick ride to 22K, 23K, or even 25K. However, this is not what we saw yesterday, the crypto king moves high only in a gradual manner, and this means that the retracement isn’t going to be that harsh. This is because if we had a massive spike, such a move is usually followed by a big correction.