Dubai: The US Federal Reserve is expected to increase interest rates — the first of a possible four rate increase in 2018 — and global markets will be paying close attention.
The meeting of the Fed, which starts on Tuesday, will also be the first for new chairman Jerome Powell. An increase of 25 basis points in expected.
Last month, Powell said that the US economy was strengthening and inflation could be gaining speed. These comments were seen as hawkish, with analysts saying that the Fed could rethink its position on three rate hikes this year, and add a fourth one.
“Markets will pay close attention to the Fed. I don’t think there will be any surprises. I don’t think the Fed will come out with more aggressive tone. There’s nothing in terms of data for the Fed to be more aggressive than they are,” said Saleem Khokhar, head of equities at First Abu Dhabi Bank asset management group.
“The market will probably take this in its stride as it’s according to the plan. Markets are anticipating that the Fed will continue to move in line with guidance,” Khokhar said.
On Friday, the Dow Jones Industrial Average ended the day 0.49 per cent higher, closing in on 25,000 mark again. The index, which has been flat since the start of February, has been oscillating between losses and gains to move in a very tight range.
“Markets are taking a breather and this is understandable. The political side of the equation is creating a lot of uncertainty, and that is why we see markets going up and down. Markets will continue to remain volatile, but without any direction, and will remain within recent ranges,” Khokhar said.
Political risks
Market participants are also nervous about political risks. Last week, US President Donald Trump fired US Secretary of State Rex Tillerson, replacing him with CIA director Mike Pompeo, a move widely expected to heighten uncertainty around the Iran nuclear deal while also emboldening the United States’ hard-line stance on trade.
Participants will also keep an eye on a G20 meeting in Argentina, especially for remarks on the trade war, after the US pushed ahead with tariffs on steel and aluminium imports. European Union (EU) officials are expected to meet with Commerce Secretary Wilbur Ross next week during the G20 meeting.
According to Ole Hansen, head of commodity strategy at Saxo Bank, the Geopolitical Risk Index (GPR) has touched its highest level since the 2003 invasion of Iraq. The previous high was seen last August and this was due to tensions driven by North Korea’s nuclear weapons pursuit.
“Gold markets are seeing one of the tightest trading ranges in six years. While the geopolitical risk index sits at a 15-year high, it is unlikely to continue. The Caldara and Lacoviello GPR index counts the number of articles in 11 national and international newspapers related to geopolitical risk in each newspaper for each month as a share of the total number of news articles,” Hansen said in a note.
Saxo Bank expects gold, which is currently stuck in a narrow $1,300 to $1,340 (Dh4,775-Dh4,922), to target $1,356 an ounce in the short term.
