The U.S. recovery and the Fed's interest rate hike are the hottest topics right now. The stronger than expected February job market report fueled expectations that the Fed would increase interest rates sooner rather than later. We believed that the market’s reaction was a bit exaggerated, and suggested in the Gold News Monitor not to take the hike for granted. The U.S. recovery is not as strong as it is commonly believed (as was confirmed by the downgraded Fed’s economic projections) and there are many downside risks, such as the Greek crisis, stubbornly low inflation, sluggish wage growth, the Chinese and global slowdown and a too strong greenback, which all may stall the Fed’s hike.

However, we are witnessing divergent monetary policies among the major central banks in the world, with the Fed being practically the only hawk. The financial markets have already set U.S. interest rates at much higher levels than in Europe. And although the Fed looks very hesitant on the proper timing of the hike – how long have we been hearing about the need to normalize monetary policy? – we can assume that the American central bank will finally increase its interest rates, especially that since March it is no longer as “patient” as it used to be.

How will this action change the global economy and affect the gold market? We observed that mere expectations of the Fed’s hike after the publication of the February job market report boosted the U.S. dollar (and punctured expectations after the March FOMC statement caused its plunge). But perhaps a modest increase of 0.25 percent is too small (if not already priced into the market) to change anything? Is the U.S. economy really experiencing recovery, which warrants the Fed’s hike? Has the gold market already discounted the Fed’s hike? How will a strong U.S. dollar affect the global economy and gold market? We are going to answer these critical questions in this edition of the Market Overview.