After a few frantic trading days, the sell-off in U.S. stocks and cryptocurrencies remains in stark contrast with the stability of gold prices. The market is now focused on the upcoming Federal Reserve interest rate decision at 21:00 on January 26 (GMT+2).
Many market watchers have suggested the Fed is unlikely to back down on its hawkish promise to end its bond-buying programme sooner than expected, raise interest rates at least three times in 2022, and reconsider its balance sheet after the bond-buying ends.
On Tuesday, the U.S. Dollar Index climbed to its highest level since 7 January while gold hit a more than two-month high as tensions between Russia and the West over Ukraine lured investors to the U.S. dollar. Meanwhile, the Fed is expected to unveil details of its plans to tighten monetary policy on Wednesday.
Strategists at TD Securities have said the Fed was unlikely to change its plan to start raising rates as early as March, given that Fed Chairman Jerome Powell’s main goal was “to prevent a de-anchoring of inflation expectations”. TD Securities also added that there was “virtually no chance” that the Fed would start its tightening cycle in March with something as large as a 50-basis-point hike in interest rates.
Despite Ukraine-Russia tensions exposing the euro, Alvise Marino, director of FX strategy at Credit Suisse, believes that the dollar’s strength has more to do with Fed policy tightening. The market expects the Fed to raise interest rates four times in 2022, which has been the main driver of the dollar’s strength over the past three months.
Meanwhile, this week’s Fed meeting could be the key to determining the outlook for gold. An increasingly hawkish tone from the central bank is likely to bolster the prospects of longer-term rate hikes and dampen the appeal of gold. If inflation eases faster than expected or if the dollar strengthens, it will weigh on gold.
Investors should also pay close attention to the upcoming Fed interest rate decision, which will be announced tonight, on 26 January at 21:00 (GMT+2). As a friendly reminder, do keep an eye on market changes, control your positions, and manage your risk well.