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Despite some easing of the banking crisis, the potential for negative economic consequences remains. And it is not yet clear whether bank failures are limited only to SVB and Signature Bank of New York or whether these banks are harbingers of new bank failures.
Inflation in the U.S. is still high. Accordingly, it creates problems for individuals, companies and the economy.
Interest rates also remain elevated. The Fed's rate hike is aimed at reducing inflation. But such an increase causes an economic downturn, and many economists believe this will eventually lead to a recession.
Top economist Mohamed El-Eran said these issues have led to a trilemma of problems that has driven the Fed into a corner. And with the aftermath of the banking crisis, the Fed is unable to make a good policy move.
The trifecta of issues facing the Federal Reserve have provided much support for gold pricing.
Last week, gold traded above the key psychological level of $2,000. Gold trading above $2,000 per ounce clearly shows the overwhelming bullish determination of market participants.
At the same time, what will happen to the dollar?
As economic problems pile up, the risk of a recession rises, and this could force the Federal Reserve to cut rates a couple of times this year.
When the Fed is faced with a choice between inflation and the economy, the U.S. central bank will always choose the economy.
However, in this inflationary environment, cutting rates is very problematic because the Fed's monetary policy response will affect price pressures.
Naturally, almost everyone understands that a recession is coming. The only question is how serious it will be.
One of the warning signals in the economy are potential liquidity problems.
If the Fed continues on the path of rates, the gap between Treasury yields and what you can get in the banking system will widen, and this will lead to a counterproductive liquidity squeeze.
The optimal strategy is to continue to reduce risk on the upside, which means selling stocks during a rally.
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