OANDA – Stocks rejoice Dovish Fed Statement, Dollar drops, Gold and Bitcoin rally, Oil pares losses

By Edward Moya, Senior Market Analyst, New York, OANDA,

US stocks rejoiced at a dovish Fed day that signaled easy-money is here to stay and that the policymakers are still not anywhere close to talking about tapering.

The Fed won’t be changing policy anytime soon despite a very optimistic growth and labor outlook.  The FOMC statement and projections solidify the Fed’s dovish commitment is etched in stone.  The dot plots still show no rate hikes will remain near zero through 2023.  Vaccinations and massive fiscal stimulus are responsible for the notable rise with growth forecasts, but an uneven recovery and with several million Americans still lacking work, the Fed will refrain from any possible tapering hints.

Inflation

Fed Chair Powell noted that these one-time increases in prices are likely to have only transient effects on inflation.  The Fed’s inflation forecasts were aggressively revised higher, with Core PCE inflation rising to 2.2% this year, above economists’ forecast of 1.9%.  Powell sees an inflation bump as short-lived and in order to prove them wrong, markets will need to see a handful of readings significantly above their target.

Tapering

Powell squashed taper tantrum questions after stating he needs to see actual progress and not forecast progress.  No communication mistake today, Powell basically signaled asset purchases are not changing anytime before the end of summer.  Even if the US reaches herd immunity by the end of the summer policy remain anchored unless the Fed’s job is done.

SLR

Powell punted the SLR question, which was somewhat expected since Congress is still waiting for some feedback from some banks.

Bonds

The bond market selloff resumed following a dovish FOMC decision and press conference.  The 30-year Treasury yield rose 6.4 basis points 2.443% and more importantly rose to fresh session highs after the decision.  The 10-year Treasury yield pared early gains and settle little changed at 1.62%.  Powell doesn’t see the recent move in Treasuries as disorderly and clearly reminded markets they have plenty of tools to respond to anything that hurts financial conditions.  The Fed could first tweak their purchases with more going to Treasuries.  Eventually Operation Twist might be used, but that is not on their radar.

Gold

Bullion investors rejoiced a dovish FOMC statement and presser.  Gold prices surged as the dollar went into freefall after the Fed remain stubbornly dovish despite significant upgrades to their growth, inflation, and unemployment forecasts.

Easy money is not going away anytime soon and the bottom if firmly in place for gold.  Gold prices are entering a new environment where they could start to rally alongside Treasury yields if inflation runs hot.

Oil

Crude prices pared earlier losses after a very dovish Fed policy decision sent the dollar sharply lower.  Oil was dragged down by a larger-than-expected build with US stockpiles, but energy traders can’t help be optimistic that crude demand outlook will get significantly better.

Vaccine rollout success in the US is triggering a wave of vacation planning that will be driving a sharp increase in jet fuel and gasoline demand.  If the dollar rebound is officially over, crude prices could continue their climb higher.

Bitcoin

Bitcoin is getting its groove back after a dovish sent the dollar sharply lower.  The cryptocurrency world also got another two votes of confidence with the Coinbase valuation jumping to US$68 billion and after Morgan Stanley signaled they will allow their wealthy clients to own Bitcoin.  Bitcoin acceptance seems to only grow and an accommodative Fed, until the job is done, should keep the world’s largest cryptocurrency strongly supported.