European and US stock futures are still in the process of digesting the Federal Reserve’s meeting outcome. There is no doubt that the rally that we saw for the US stocks was remarkable yesterday. It is likely that we may see a continuation of this rally today.
Investors have taken one key takeaway from the Fed meeting, and that is it is time to buy Bitcoin and gold. Gold prices are still holding on to their stellar gains today as the dollar index has been unable to recovery any of its losses.
Bitcoin has moved sharply higher after the Fed meeting, and the journey has started for another record high, especially if the price holds its $55K support level.
What Did The Fed Say Yesterday?
While we had no change in rates as expected, we did have a slight change in the dot plot and a major upgrade in the economic outlook from Federal Reserve Officials. The Fed has moved to raise its 2021 growth forecast to 6.5%, and this is significantly higher than it was the last time the Fed did this, which was back in December.
Unemployment rate fell to 4.5%; it was 5% in December. PCE inflation 2.4%, up from 1.8% in December and core PCE at 2.2%, up from 1.8%. So the economy is going to be growing a lot more strongly. Unemployment will come down a lot faster and inflation will be higher than the Fed first suggested back in December. Of course, that was before the latest stimulus packages hit the economy.
The Fed also upgraded its statement by saying that the Covid-19 pandemic is causing tremendous human and economic hardship across the United States, and around the world as they did the last time. The Fed said that “following a moderation in the pace of the recovery indicators of economic activity and unemployment have turned up recently.”
What About Dot Plot?
As for the dot plot, the focus of attention on Wall Street will remain on the dot plot. We now have four people who are seeing a possible rate increase in 2022. Of course, nobody this year expects a rate hike this year. Seven dots now suggesting a rate increase, at least one in 2023. So it’s still a minority of the 18 voters. The 18 members of the Open Market Committee who think we’re going to see a rate increase by 2023. But they’re moving in that direction.
Are Dots Useful?
Dots are quite helpful to anchor front end expectations that are priced into interest rates. So obviously the market is much more aggressive in terms of timing of the first rate hike. In addition to this, the dots will save the economy from interest rate-related exhaustion.
What About Asset Purchase
Commercial mortgage backed security purchases by the Fed are going to be phased out. Last auction is next week. But all the other bond buying stays the same: 80 billion in treasuries and 40 billion in mortgages.
All Eyes on BOE
All eyes will be on the Bank of England and their monetary policy decision. The bank will be sending some important messages to the market and most of them are likely to be hawkish, but they will be wrapped with a dovish tone.
Firstly, the bank needs to set the record straight that there will be no need for negative interest and the market players need to eradicate those expectations. Secondly, the bank will need to embrace the remarkable progress on the vaccine front, and how that has improved the economic health. Finally, the governor is also likely to show his appreciation in terms of support from the fiscal side, and its influence on economic recovery.
Despite all of these positive aspects, the reality is that the UK is still far from reaching full economic recovery as the full impact of Covid-19 is still unknown, and the economy hasn’t opened yet. In addition to this, the unemployment rate has been kept artificially low through government support, and we will see the true picture once the government begins to withdraw its support.
So, Sterling is likely to see further boost in terms of its performance especially against the Euro and the dollar today. (more on currency strength)