Fed's stance to determine direction for US dollar, commodities

After weeks of upward momentum, commodities in general are struggling to build on the gains, as market players try to assess various factors ranging from policy changes under the Joe Biden administration to sustainability of higher Chinese commodity imports as well as worsening virus situation in China and monetary policy stance of central banks.

Biden took office as the US President on January 20 and within days signed a stack of executive orders and actions on immigration, climate change, COVID-19, racial equality and more.

While Biden has taken an aggressive approach to deal with important matters, financial markets are concerned about additional stimulus measures as well as what cost it entails. Also in focus is Biden administration’s stance on tax hikes, US-China relations, etc.

While the virus situation has been worsening, market players have become nervous about a surge in cases in China, which has forced it to impose stricter restrictions. Although Mainland China reported a slight decline in new daily COVID-19 cases on January 22 but cases have been rising for the last few days.

The key event this week was the spate of central bank meetings, however, there was no major cue as most maintained a cautious outlook with the virus outbreak out of control but did not indicate possibility of any immediate action.

The European Central Bank kept monetary policy unchanged while President Christine Lagarde warned that the virus continues to pose a serious risk and said that the ECB was prepared to provide even more support for the economy if needed.

The Bank of Japan kept monetary policy steady and upgraded its economic forecast for next fiscal year, but warned of escalating risks to the outlook due to virus concerns while reiterating readiness to ramp up stimulus further.

The Bank of Canada said it expects the Canadian economy to contract in the first quarter of 2021 but decided to keep its monetary policy unchanged.

On other hand, Norges Bank kept its benchmark deposit rate at zero as expected but hopes of monetary tightening rose as the bank also signaled that the prospect of bringing the pandemic under control seemed slightly brighter than previously assumed. Brazilian central bank removed forward guidance from its policy statement on January 20 stating that conditions requiring the forward guidance, including rate cuts, no longer held, a sign that the central bank wants flexibility to raise interest rates in coming months if required to combat inflation.

The recent central bank meetings show that future policy stance largely hinges on how the virus situation pans out. With this in the background, the focus will now shift to Fed’s monetary policy meeting next week. With rising virus cases, uneven economic recovery and low inflation, there is little reason for the Fed to change its monetary policy. The Fed’s stance however will determine further direction for the US dollar and thereby commodities.

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