The greenback weakened sharply on Friday, as the Fed statement was interpreted as dovish, despite the removal of ‘patience’ from the wording. The downgraded expectations for a mid-year rate hike induced investors to exit positions which would have benefited from a strong U.S. dollar. Now, the crucial question for the gold market arises: does this decline signal a trend reversal or just a correction?

The Fed's less optimistic view on U.S. economic growth and inflation has led to the greenback’s plunge and the gold’s rally. Gold futures for April deliveries increased by 1.5 percent to $1,169 per ounce on the Comex and SPDR Gold Shares has seen net inflows year-to-date in March.

However, we believe that the divergence in economic growth and global monetary policy may lead to the next U.S. dollar bull market. The Fed is almost the only one major central bank considering an interest rate hike in the nearest future. The relative hawkish stance is the reason why the 10-year interest rates in the U.S. are almost 10 times higher than in the Eurozone and, thus, why the greenback has been rising since 2014. Thus, the correction in the EUR/USD exchange rate could end soon, which would be negative for gold prices.

Nevertheless, investors should be aware that we are living in the era of increased volatility in the currency markets. Indeed, the volatility of the dollar surged to the multi-year high after the Fed’s last statement on monetary policy. The markets seem to be oversensitive to the Fed’s official commentaries. Today, for example, the U.S. dollar was gaining against euro, because James Bullard, the president of the Federal Reserve St. Louis., said: “the Fed risks falling behind the curve if it waits too long before raising rates and that such a situation would warrant a more aggressive rate hike in the future.”

To sum up, we consider the divergence in international central bank policies as a fundamental reason why the U.S. dollar may rise in the long term, which would be a headwind for gold prices. However there are also many factors, which could provide some support for the yellow metal, such as the next acts in the Greek drama (today a meeting is scheduled between Alexis Tsipras and Angela Merkel in Berlin).

Actually, there are many factors this week which may disrupt the long-term trend in the U.S. dollar. Today, the ECB President Mario Draghi will address a European Parliament committee and two FOMC voting members (Stanley Fischer and John Williams) are going to give speeches. Also today, the Chicago Fed national activity index and data on existing home sales are scheduled to be published, while tomorrow we will see data on new home sales, CPI and U.S. and Eurozone’s PMIs. Stay tuned!

Thank you.

Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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