It is a green day for markets, thanks to the dovish tone adopted by the major central banks. European markets and US futures are trading sharply higher because the old trade is back on track- central bankers have decided to provide their support again.
Markets have learned this week that the major central banks are a lot more dovish now as compared to their stance a few months ago. We all know that central banks have been data dependent, but it is only now that they have started to acknowledge the weakness in the economic numbers. Last night, the Fed lowered its inflation forecast from 1.8% to 1.5% but , there wasn’t any change in the growth forecast. The reason that the event was dovish came from fact that the Fed’s outlook of the economy isn’t positive; they said the global uncertainties are increasing.
They feel it is time to shift the needle of the their monetary policy to spur the growth again or at least not letting the global economy go off the rail which is primarily due to the following two reasons:
*Lack of support from the central banks- tightening monetary policy
*Nationalism: the never ending trade war between the US and China.
Gold Blasting To The Upside
The biggest headline from last night was from the FOMC meeting, the monetary policy event was more dovish than expectations and this pushed the gold price through the roof. Market players has been expecting a few rate cuts by the Fed this year, and now, it seems like that a rate cut could possible as soon as July.
The dollar index took a nose dive last night and there are still no signs of recovery. But it is important to keep in mind that the Fed is still on the path of winding down their balance sheet by the end of September so let’s not get ahead of ourselves. Therefore, the gains in the gold price may short live, but the odds for such an event taking place are low
Looking at the dot plot, it doesn’t show any change in character, meaning no change in the interest rate path for this year. However, speculators still think that there is a possibility of rate cut and it can happen as soon as next month. The debate is if the Fed is going to cut the interest rate by 50 basis point during their next meeting or if we are going to two rate cuts each containing 25 basis points.
Carney’s Hands Are Tied
Now, all eyes will be on the Bank of England’s monetary policy decision. The bank is in a very tight spot to defend the rising inflation, it needs to address this situation. However, Mark Carney, the governor of the Bank of England has his hands tied because of Brexit. I do not expect any change in the interest rate from the bank today but not expecting any dovish statement from the bank as well which will be at odd comparing the stands of other central banks such as the European central bank and the Federal Reserve.
The economic numbers have softened which means talks of any rate hikes should not be part of any equation. this doesn’t mean that we will not hear any hawkish bias from the bank today and this could really define the floor for the sterling dollar today.
