On Monday (January 24), the U.S. dollar index refreshed to a nearly two-week high of 96.13, and the U.S. dollar strengthened against all other G-10 currencies, with the Nordic currencies lagging behind due to the turmoil in Eastern Europe. Spot gold fluctuated upwards, closing at $1,843.06 an ounce, as investors focused on the Fed's policy meeting, which ended on Wednesday, for signals on how much the Fed will raise interest rates this year and when it will begin. As U.S. stocks rebounded sharply, U.S. oil prices narrowed to 1.25% in late trading, after tumbling as much as 3.8% during the session, as risk aversion dominated financial markets due to the prospect of tighter monetary policy.
Driven by bottom-hunting funds, U.S. stocks, which had the biggest drop in nearly two years, recovered all their lost ground amazingly. Geo tensions and the Fed's policy actions to tackle inflation have roiled markets. Retail, industrial and energy stocks led late gains in the S&P 500, which fell as much as 4%. The Cboe Volatility Index surged as much as 35% to its biggest since October 2020. Despite a drop in global risk assets and heightened geopolitical risks, interest rate markets remain firmly expecting the Federal Reserve to raise interest rates. The swap market shows that the Federal Reserve is expected to raise interest rates by 25 basis points in March, and the market expects to raise interest rates by nearly a full percentage point in 2022.
Spot gold fluctuated higher and closed at around $1,843. Geopolitical tensions over the Ukraine issue once dragged down U.S. stocks, enhancing gold’s safe-haven appeal, while investors prepared for the Federal Reserve’s decision to raise interest rates. The Ukrainian story is bullish for gold and Fed policy will eventually evolve into a slightly more conservative tapering, as the Fed still thinks many things will be temporary, said Ed Moya, senior market analyst at brokerage OANDA. Gold also appears to have somewhat shrugged off the pressure of safe-haven flows into the U.S. dollar.
Gold just got a very bullish signal as investors are returning to the precious metal in a massive way. The world's largest gold-backed ETF, SPDR Gold Shares, recorded its biggest net inflow since its listing in 2004: $1.63 billion, or 27.6 tonnes by weight. Changes in ETF holdings are closely watched as a gauge of investors’ long-term interest in gold; holdings fell in 2021, a year when gold prices were flat.
This week, the Federal Reserve will hold a crucial policy meeting, which economists expect will signal rate hikes starting in March. Even as the Federal Reserve prepares to tighten monetary policy, which could dampen gold's appeal, hedge funds trimmed bullish bets to a five-week low in the week to Tuesday on the Comex.
U.S. domestic crude inventories rose last week for the first time in eight weeks, according to a report from the U.S. Energy Information Administration; U.S. demand remains strong despite a mixed outlook for overall inventory data. The total supply of refined oil products hit the highest level for the same period in at least 30 years.
Quinn Kiley, a portfolio manager at Tortoise, said we may see some price shocks in the short term, but by the second half of this year or early 2023 we will see supply keep up with demand growth and the market will be more balanced.
White House economic adviser Brian Deese said the U.S. will work to speed up the release of oil from the strategic reserve. But Biden's options to curb the rise in oil prices are limited and may not last. The recent surge in crude oil prices poses a challenge to consumer countries and central banks as they try to curb inflation while supporting economic growth.
Ole Hansen, head of commodity strategy at Saxo Bank, said underlying fundamentals remain strong, as the IEA confirms in its monthly report, but technical indicators are signaling overbought and oil prices could soon find themselves in a period of consolidation.
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