Strength for the Dollar as the Fed Looks More Hawkish

The Federal Reserve (‘the Fed’) cut its funds rate to 4.25-4.5% on Wednesday 18 December as widely expected, but the primary intrigue from the meeting was the new dot plot indicating that only two cuts are likely next year. This gave the dollar significant tailwinds and challenged many other instruments. This article summarises recent news and data affecting American monetary policy then looks briefly at the charts of gold and bitcoin.

The likelihood of only two cuts by the Fed in 2025 is a significant change from the previous dot plot which suggested four. The Fed has also revised its expectations for growth in the USA upward compared to September; GDP is now expected to go up 2.5% in 2024 and 2.1% next year. The outlook for inflation was also revised up and unemployment down. A small majority of participants now expects the Fed to hold until the second quarter of 2025:

Although there had been some possibility that the Fed would slow down further next year since last month, that wasn’t the consensus view until after the latest meeting. On the whole, GDP has been significantly stronger than expected in 2024 while inflation started to rise again in October. It’s not clear yet whether the latest increases by inflation are the beginning of a new trend, so traders are likely to watch CPI and PCE closely over the next several months for clues on when the Fed might cut again.

This new situation is basically negative for gold, but the overall context is more ambiguous for cyclical instruments like shares and many cryptocurrencies. While higher rates are a challenge, the generally positive economic situation stands in sharp contrast to long-running expectations for a recession.

Next week is particularly inactive in terms of scheduled news and data because of the holidays in many major countries. However, volatility might increase just before Christmas: a ‘Santa rally’ seems to be possible based on the mostly sharp reactions to the news from the Fed, but that depends on sentiment.

Gold Still Reluctant to Push Below $2,600

Gold’s reaction to the news of only two likely cuts next year was pretty typical. Demand is likely to be at least somewhat lower than in the first three quarters of 2024 now that rates will probably remain higher for longer. However, demand for havens is unlikely to decrease significantly in the near future amid turbulence in Syria and Donald Trump’s upcoming inauguration.

The initial reaction to the Fed’s meeting seems to have been somewhat excessive, with the price retracing around half of the loss on 19 December. There’s been no clear increase in the volume of selling. $2,600 seems like a moderately strong area of support based on the bounces from there in late November and around 6 December.

However, the main strong support in focus is the 100% weekly Fibonacci extension around $2,545. The next movement might be either back to the value area between the 50 and 100 SMAs or a retest of $2,550 depending on momentum and sentiment in the next few days, but a clear longer term direction now seems unlikely to develop before the new year.

$100,000 Remains the Key Reference for Bitcoin

Like gold, bitcoin retraced lower around the Fed’s latest meeting, which is a normal reaction as the outlook for monetary policy becomes less dovish. Bitcoin is arguably a bit less vulnerable than gold to higher rates because there are various ways for holders of transferable bitcoins, especially now that many coins are at or close to all-time highs. Participants in crypto markets view the likely policies of the incoming Republican government positively.

Bitcoin’s momentum has been lower in December which makes sense as the price approached the critical and long-awaited area of $100,000. Volume has also decreased somewhat compared to the peak around the middle of last month and there’s no longer such a strong overbought signal as there had been for most of November. The latest retracement from the 100% weekly Fibonacci extension was also expected since this was the stretch target since the middle of last month.

Given current strong sentiment, a move back below $90,000 seems unfavourable in the near future, but $100,000 could remain an important battleground. Now that the uptrend is clearly mature and participants seem inclined to buy more quickly during even relatively modest retracements, a retest of $108,000 seems likely in the next few weeks. However, traders should prepare for higher volatility during upcoming holidays.

This article was submitted by Michael Stark, an analyst at ExnessExness.

The opinions in this article are personal to the writer. They do not reflect those of Exness or FX Empire.