USD, Gold And Stock Price Volatility Eye Looming Fed Meeting

Hopes for global economic growth rebounding later this year are quickly fading. Market fears have been fanned by the growing uncertainty surrounding US trade policy on the back of an ongoing Sino-American trade spat and the latest threat of Trump levying tariffs on Mexico. Although, the recent hit to risk assets in response to these developments has since reversed as traders beef up bets that the Federal Reserve (Fed) will cut rates and shore up sentiment to sustain the US’ record-setting economic expansion.

As expectations for a dovish Fed balloon, cross-asset volatility has faded. With markets currently pricing in 3 rate cuts by the end of 2019, however, the risk of investor complacency threatens to stoke additional price action in currencies, gold and stocks – particularly if the FOMC and Chair Powell shock markets with a firm stance on monetary policy this Wednesday.

SPOT GOLD (XAUUSD) VS CURRENCY MARKET VOLATILITY (FXVIX)

(Click on image to enlarge)

Spot Gold Price Chart and Currency Volatility

According to FXVIX – an equally-weighted index of Cboe’s 30-day implied volatility readings on the Euro(EUR), Pound Sterling (GBP) and Japanese Yen (JPY) – currency market volatility has ebbed from its spike following the influx of global uncertainty in late-April. Owing to expectations that the next Fed meeting will reveal a move towards looser monetary policy mirroring other central banks, these risks appear to have been placed on the backburner for now.

While hopes for a dovish Fed have temporarily boosted appetite for risk and curbed a sharp rise in FXVIX, yields on US debt remain subdued as traders seek safety in Treasuries due to fears over slowing global growth. This theme of lower interest rates while the Fed and investors react to adverse shocks to the economy, in addition to a weakening US Dollar (USD) from easier Fed policy, are expected to continue bolstering spot gold (XAUUSD) while propelling additional FX and gold price volatility.

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