Highlights

Central Banks take action for dollar liquidity while stocks prices drop. Meanwhile, gold glistens as uncertainty persists! The Fed faces a conundrum: should they hike rates despite brewing banking turmoil and hushed recession talks? Will they mimic ECB’s moves with a 25 bps jump?

In a bid to prevent a repeat of the frenzied 2020’s cash dash, the Fed and major global central banks unite to protect investments and reaffirm the might of the US dollar. Meanwhile, Bitcoin shines triumphantly, reaching dazzling heights over $28K.

Bitcoin surged almost 5.2% to reach an all-time high of $28,380 on Sunday night. An increase of $1,400 from its prior closing price, the digital currency has grown by more than 72% since January 1st. Ethereum’s native cryptocurrency Ether also experienced a rise of 3.58%, reaching a price of $1,827.2 and adding $63.1 to its previous close.

Unity Of Purpose

The U.S. The Federal Reserve (Fed) made a move on Sunday, uniting with powerhouse central banks to guarantee a smooth sailing for the U.S. dollar, which reigns supreme as a reserve currency in the world’s financial arena.

Fed Moves

The Fed is kicking things up a notch by increasing the frequency of dollar swap lines with major central banks from weekly to daily! As of Monday, this global money exchange gala helps central banks borrow U.S. dollars, while the Fed remains safe from any unfortunate downturns. 

How does this work, you ask?

It’s a dazzling dance of currency, where foreign central banks pirouette their own currency into equal amounts of U.S. dollars, with the Fed as their partner. When the song ends, the bank sashays back the borrowed dollars (with a little extra for the tip jar), and everyone glides away happy.

Efforts After Banks Collapse

In an effort to ease exchange rate fluctuations and protect global credit supply for households and businesses, several crucial financial adjustments have been made. This comes after the collapse of three US banks, and the rescue of a distressed Swiss lender, Credit Suisse, taken over by UBS and Swiss National Bank. 

These developments reflect growing anxiety over financial stability and cast doubt on the Federal Reserve’s capacity to keep raising interest rates. 

Since March 2022, the central bank has increased the borrowing cost by 450 basis points, causing turbulence in various asset markets, even affecting cryptocurrencies last year.

The Fed’s support of global dollar liquidity has prevented a frantic global cash grab, protecting crypto-assets like Bitcoin from being sold off by investors seeking refuge in the US dollar during uncertain times. 

By ensuring an uninterrupted flow of risk assets – including Bitcoin, which is regarded as a safeguard against the banking system the Fed has paved the way for growth in these assets, as evident from the nine-month high that Bitcoin recently achieved, with a whopping 25% gain in December alone, according to CoinDesk data.

Dollar Swap Lines

Dollar swap lines have historically weakened the mighty greenback, which creates a captivating inverse relationship with riskier assets like Bitcoin. 

The adrenaline-filled rollercoaster of March 2020’s pandemic-induced crash brazenly showcased this dance, with the dollar index soaring to towering heights and Bitcoin plummeting to staggering depths, losing over half its value.

Wall Street Updates

In a wild roller coaster ride, the financial markets displayed a tumultuous week, with financial stocks bearing the brunt. Wall Street witnessed a contrasting scenario, the Dow Jones staggered with a 0.15% drop, while the tech-centric Nasdaq leaped by a staggering 4.41%. 

European markets faced a downturn, with the DAX 40 and FTSE 100 diving by 4.28% and 5.33%, respectively. Asian markets experienced a mixed bag, as Japan’s Nikkei 225 slipped 2.88%, while Hong Kong’s Hang Seng Index climbed 1%.

Nerves in the regional banks were palpable following the collapse of Silicon Valley Bank earlier this month. Despite being salvaged by larger banks, First Republic Bank shares plummeted more than 70% in the last 5 trading sessions. Credit Suisse’s woes added fuel to the fire, with several major banks reportedly cutting trade with the lender or contemplating it.

In an adrenaline-fueled trading frenzy, traders raced to price in rate cuts from the Federal Reserve, with markets predicting a drastic 100 basis points drop within 6 months – a stark contrast to previous hikes expectations. This rapid shift sent the Federal Funds Rate spiraling to 4.25%, causing the 2-year Treasury yield to stumble.

Battered and bruised, the US Dollar dipped as the market spotlight shone on a ‘dovish’ Fed. Meanwhile, gold, the eternal foil to fiat currency, gleamed, skyrocketing 8.9% this month to levels not seen since the height of the pandemic.

Amidst the chaos, WTI crude oil prices took a nosedive, plunging 13.55% in just one week, triggering flashbacks of February 2020.

Week Ahead

Get ready for an enthralling week as the Federal Reserve takes center stage on Wednesday! The once-thought 50-basis point hike is now a distant memory, making way for an end to the tightening cycle. The showdown intensifies, with just over half the bets leaning towards a 25bps boost. 

As the odds approach a nail-biting 50-50, the stage is set for a suspense-filled week. But don’t forget, the Bank of England is also playing its cards in the rate-setting game. 

So buckle up and stay tuned to see what twists and turns the markets have in store!

Projections

Analysts expect this week, the ECB to turn hawkish with a 50 bps rate hike to combat inflation, causing the Euro to rise but bank stocks to suffer. Meanwhile, the BoE navigates the stormy banking sector while weighing the UK CPI and rate decisions. 

As for the US dollar’s fate, all eyes will be on the Fed’s policy moves, with traders cautiously anticipating a dovish guidance amidst increasing financial turbulence.

Tech Stocks Soar as Nasdaq 100 Outshines Dow Jones: A Week of Uneven Gains and Mixed Projections.

XAU/USD Analysis

Gold has daringly shattered its previous YTD peak, boldly aiming for the captivating $2000 milestone. Surpassing this enigmatic barrier could bring forth the intriguing possibility of reaching new 2022 heights of $2069 and perhaps even conquering the unparalleled pandemic pinnacle of $2074. 

Gold ventures into the realm of the unknown, with little experience above the $2000 threshold. 

Yet, amidst the excitement, the RSI stands tall in overbought territory, potentially attracting bears, and reminding us of Gold’s disconnect from its dependable 50, 100, and 200-day MAs. 

Is a strategic retreat on the horizon or will market sentiment continue to pave the golden path? Only time will reveal the fate of this precious metal.

IS Gold In Turbulence Waters?

Despite its reputation as a treasured “safe haven”, gold has found itself struggling in the midst of a global inflation surge. 

With high rates exceeding expectations, this should be an optimal time for investors to buy into such expensive assets yet years-long downtrends continue even when all signs point towards growth and higher demand. 

Could it be that the glory days of buying gold may have already passed?

Amidst the swirling chaos of today’s world, the need for a safe-haven asset is glaringly obvious. 

Europe finds itself hamstrung by its reliance on Putin’s energy as Ukraine is invaded, while escalating tensions between China and the US sound the death knell for three decades of harmonious globalization. 

The menacing shadow of Covid lingers, suffocating economic growth and rattling the foundations of global supply chains. 

As resilience takes the driver’s seat over cost, worries grow in Asia with nervously watchful eyes on China’s intentions towards Taiwan and regional defense budgets soar.

Yet, in a perplexing twist of fate, the value of gold continues to wane.

While it might defy logic for gold, the so-called haven or inflation shield, it’s evident that gains occur during catastrophes or inflation surges. However, these triumphs are fleeting and never strong enough to shatter the dominating downward trend. 

Gold has been an attractive investment due to its ability to respond well during periods of inflation. 

Over the last decade, since 2009, when historically low interest rates were set around the world and particularly in the US, gold’s appeal increased as investors could keep their capital safe without having any additional costs or losses from a lack of yield on offer with this widespread asset. 

This trend is now beginning to reverse itself however; rising global interests have caused non-yielding assets such as gold’s attractiveness towards investors start waning again.

Influence of interest rates

In reality, gold’s value is heavily swayed by the anticipated trajectory of interest rates, particularly when viewed in real terms. As potential real rates decrease, the allure of a non-yielding asset like gold grows. However, when rates begin to climb, gold’s attractiveness plummets.

This relationship might not be unbreakable, though. Should central banks’ efforts to combat inflation falter, gold could reclaim its position as a safe haven. The US Federal Reserve appears to be making progress in stabilizing prices, but it’s still too soon to celebrate.

As various central banks attempt to increase their efforts in order to tackle rising inflation, it is yet uncertain how successful they will be. This method of tackling a situation like this has never been tested before and the stakes are high with interest rate rises meaning tangible financial hardship for consumers and business owners alike.

Currencies Updates

This week, the markets will be abuzz with anticipation as the Federal Open Market Committee (FOMC) meets to discuss monetary policy decisions which could have a major impact on our economic future.

Last week, the US dollar took a hit with a 0.8% drop, due to a significant fall in US bond yields and uncertainty in the Federal Reserve’s tightening plans amidst banking chaos. 

The collapse of two mid-sized regional banks alarmed the markets, raising concerns of a financial catastrophe. In response, the Fed stepped in with emergency measures to stabilize liquidity-strapped institutions, urging optimism for monetary policy.

This chart reveals the intriguing drop in Treasury yields and Fed rate expectations since last week, even with Jerome Powell’s confidently hawkish stance in Congress. 

As recent events unfold, the US dollar may experience a decline, barring any major financial crises that could boost defensive currencies. 

Forex Traders can anticipate the greenback’s future after the Fed’s policy decision on Wednesday. Currently, market predictions suggest a possible quarter-point rate increase, resulting in borrowing costs reaching their highest since 2007.

It’s not time to rule out a “break” just yet with the uncertainty brewing between now and Wednesday. After all, recent events remind us that unpleasant surprises tend to pop up when least expected. Such unexpected financial turbulence may prompt our cautious policymakers to take a “wait and see” approach.

As we await the Fed’s decision, it seems the stars are conspiring for dovish guidance. The FOMC is expected to highlight the need for maintaining financial stability and to express their dedication to nipping systemic risks in the bud. 

The ripple effect of their message? We might witness the good ol’ greenback weaken even further.

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