The sharp recovery for company shares' demand and the US dollar's weakening yesterday have stopped. Why is this so and what should be expected today and in the following days when the Fed announced its view on monetary policy?
After Monday's sharp collapse in the markets, a rebound was expected on the following day, which was accompanied by a growth in demand for company shares and a weakening of the US currency. The media explained this dynamics on Monday by the fact that investors clearly closed long positions on stocks and bought the dollar in anticipation of corporate reports of companies, which will significantly fill this week. On Tuesday, the growth in demand for risky assets and the weakening of the dollar were interpreted as the result of a good start to the publication of reports.
In our opinion, everything is not so simple. On the one hand, investors' attention have really turned to company reports and this affects the demand for shares. But on the other hand, we believe that this factor is not the only one that affects the dynamics of the markets, but also other several reasons.
Earlier, it was mentioned that the Fed will most likely begin to reduce the volume of government bond repurchases later this year in the wake of the expected more dynamic economic recovery in the US and globally. There is a possibility that the published latest economic statistics are to indicate the formation of a negative bottom in the economy, from which it will push off and begin to actively recover in the spring of this year. In this case, the US regulator may make it clear at the end of today's meeting that it will closely monitor this process, although it will generally retain its rhetoric regarding a soft monetary exchange rate and a promising low level of interest rates. Nevertheless, this will be a signal for the market, which can push up the growth of Treasury yields and this will be an important supporting factor for the dollar.
On the other hand, these hints amid the expectations of a dynamic economic recovery in the US may provoke Congress – if not to talk about J. Biden's new support measures in the amount of $ 1.9 trillion, then to significantly lower the aid package. This will be a strong negative signal for investors who previously depend on this factor actively when buying company stocks. Such prospects may lead to a local correction in stock markets and an increase in the US dollar in the future.
Assessing today's possible dynamics in the markets, any significant changes is not expected, unless the Fed and its leader J. Powell will say something surprising. It is very possible that the local decline in shares, which began on Monday, will continue and will be accompanied by the growth of the US dollar.
Forecast of the day:
Gold is trading almost unchanged in anticipation of the outcome of the Fed's monetary policy meeting. If the result of the meeting is positive for the dollar, we should expect the price of gold to continue its local decline to 1831.85.
The USD/CAD pair remains in the range of 1.2625-1.2785. A price consolidation above 1.2685 may lead to the pair's local growth to 1.2785.
