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17 February 2022,06:53

Weekly Outlook

Unexpected Fed Dovishness Causes USD Drop and Gold Rise

17 February 2022, 06:53

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On Wednesday evening (GMT+2), the US Federal Reserve released its meeting minutes, revealing its plans for interest rate hikes, as well as a “significant reduction” in asset holdings in response to spreading inflation. However, while its outward tone might seem hawkish, the details of the minutes lacked bite without any clear signals indicating more aggressive tightening. State Street Global Advisors chief economist Simona Mocuta observed that the market has interpreted the minutes as “dovish relative to expectations”, adding that it was “anticlimactic”.

Post-market

In response to the less-hawkish-than-expected Fed minutes, the US dollar and Treasury yields both dipped, with the 2-year Treasury note — the maturity most sensitive to rate expectations — ­sliding three points to 1.52%. This, in addition to increasing Russia-Ukraine tensions, sent the safe-haven asset of gold to near 8-month highs on Thursday.

Despite Moscow announcing that it was pulling back troops, U.S. Secretary of State Antony Blinken has said that Russia was moving critical units closer to the Ukrainian border, increasing uncertainty about the geopolitical climate, causing crude oil to continue its rally. 

Stephen Innes, managing partner at SPI Asset Management has expressed that “investors are lost in the fog of war”, saying that it is very difficult to have a good overview of things in a market where one has to “trade on a hair trigger”.

Meanwhile, the stock market has managed to shrug off the geopolitical uncertainty to post slight gains amid a relatively dovish Fed, with the S&P 500 posting slight gains at closing on Wednesday.

Investors are advised to keep an eye out for the US Initial Jobless Claims numbers for the week of 12 February, which will be released Thursday, 17 Feb at 08:30 (GMT+2). As a friendly reminder, do keep an eye on market changes, control your positions, and manage your risk well.

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