Geopolitics comes to the fore

On Friday, we observed investors retreating from risk. This is mainly the result of geopolitical tensions. Market volatility has increased. Wall Street indexes have definitely taken a southerly direction. SP500 lost 1,5%. and the Nasdaq Composite 1,6 percent, the Dow Jones fell below the mark by 1,2 percent. VIX "fear" index rose for a moment to above 19 points. and currently remains above 17 points. After setting a new record high at USD 2430, gold fell sharply by USD 100. In addition to geopolitics, shares were influenced by unsatisfactory quarterly results from the banking sector and those related to inflation. US bond prices rose as a result of demand for 'safe assets'. The US dollar and oil gained.

Geopolitics in the foreground

Geopolitics comes to the fore again. Iran fired over 300 drones and missiles at Israel on Saturday evening. However, they were neutralized and fortunately there were no fatalities. G-7 leaders condemned the attack, while US President Joe Biden spoke to Israeli Prime Minister Benjamin Netanyahu and reiterated that Washington's support for this country is "iron".

On Friday, we also received statements from the Fed. Mary Daly admitted that she believed there was no urgent need to adjust the interest rate and that monetary policy was currently in a good place. This is another hawkish voice that reduces the chances that the Fed will start cutting rates in June. Bostic from the Atlanta Fed office supports only one downward move in rates. The market valuation based on Fed Funds Futures contracts currently indicates approximately 20%. chances of monetary conditions easing by mid-year by 25 basis points.

The hawkish FED supports the dollar

From the US data, we received April consumer sentiment reported by the University of Michigan, which dropped to 77,9 points. with 79,4 points in March. Annual inflation expectations increased to 3,1%. and long-term up to 3%. from 2,8 percent previously.

Last week, the latest US inflation data triggered a paradigm shift in the currency market. Currently, the main scenario is the one in which inflation in the US will remain elevated for much longer, and the Fed will have to postpone its plans to cut interest rates for now. The recently observed strength of the dollar is the result of the prospects of a hawkish Fed and the perception of USD by investors as the currency of first choice in periods of increased risk aversion. This trend may continue for the next few weeks.

Source: Łukasz Zembik, OANDA TMS Brokers