Forex Flash: Fed locked in to current strategy despite US economy – UBS

FXstreet.com (Barcelona) - Q3 policy-driven price action in gold brings us to an interesting point. Since Q4, the Fed's balance sheet has been expanding again but gold has not responded in the usual 'debasement' manner. According to Research Analyst Gareth Berry at UBS, “Initially, this was attributed to better US data and stable inflation expectations (or easing disinflationary pressures). Such factors are indeed negative for gold and a stronger dollar is a part of this (self-fulfilling) process.”

The first week of April witnessed a massive dose of (potential) liquidity provision from the Bank of Japan, while weakening data out of the US is also pointing to shifts in policy expectations again for the Fed. In addition, if emerging markets are indeed weakening, then stimulus either through rates or outright quantitative policy (such as FX-intervention) can be expected. All of these factors should have proven to be positive for the yellow metal.

Again, points to other factors at play such as positioning. “However, if we look at the broader policy picture, then perhaps the move in the gold price is telling markets something far more pernicious: Central Bank activism has failed. Simply put, even if the US' economy is weakening further, it is hard to see what the Fed can do beyond their current actions.” Berry adds.