By Lukman Otunuga, Senior Research Analyst at FXTM
Growing worries about inflation have gripped markets and left investors on edge.
Wall Street slipped on Monday, dragged down by declines in technology stocks as concerns over rising prices soured risk sentiment. Although Asian stocks opened firmer Tuesday morning and US futures are positive, caution ahead of Wednesday’s FOMC meeting minutes could limit gains across equity markets.
Federal Reserve policymakers have repeatedly played down the inflation risk as transitory. However, the volatile movements witnessed across financial markets recently suggests that investors think otherwise.
If inflation proves to be longer lasting, this could force the US Fed into action sooner rather than later. Such a development would be bad news for equity markets, especially expensive growth stocks sensitive to higher interest rates.
Dollar Index dips below 90
The dollar stumbled into Tuesday’s trading session under renewed pressure thanks to dovish comments from the Fed’s Vice Chair Richard Clarida who indicated that it is too soon to talk about tapering, citing the weaker than expected April labour market report.
Dallas Fed President Robert Kaplan, a known “hawk” on the FOMC, also spoke on Monday and said he believed price pressures would moderate in 2022.
The Greenback has weakened against every single G10 currency this month with the Dollar Index (DXY) approaching levels not seen since late February. If the DXY secures a solid daily close below the 90.00 psychological support, this signals further downside with 89.70 acting as the first level of interest.
Gold continues to gain
Gold bulls continue to draw strength from a weaker greenback and inflation fears. The precious metal has gained 5.7 % this month and could extend gains as inflation concerns continue to grow.
Where the metal closes this week may be influenced by the FOMC meeting minutes, but a solid break above $1870 could open the doors towards $1900.
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