Geopolitical uncertainty puts investors on hold

With the euro strengthening in hopes of peace, and commodity-linked currencies benefiting from higher prices, the US dollar is poised for its first weekly loss in six weeks. Nevertheless, a lack of progress in the fourth round of Russia-Ukraine talks caused the markets to become hesitant overnight, setting commodities on edge again and making stocks take a breather after several days of gains. Oil prices surged to over $100 overnight, and Brent crude futures added 2% to $107. Commodity-linked currencies rose with it.

Events of the day

Biden and Xi will speak on the phone, scheduled for 1300 GMT, while Washington has already warned lower-level Chinese government officials that more significant support for Russia might lead to Beijing's isolation. On the data front, Eurozone wages/employment and trade balance data are due to be released later today. Investors are also waiting for Canada's retail sales and US housing market data. Moreover, speeches from Fed officials will be in the spotlight today. Canada's Retail Sales release for January is expected to show an increase of 2.4% versus last month's decline of -2.5%. This will be a crucial release for USD/CAD traders since the Fed's rate hike strengthened expectations for another rate hike from the Bank of Canada. Additionally, oil price movements and risk catalysts play a key role.

The British pound halted advances after the BoE meeting

As expected, the Bank of England also raised interest rates on Thursday. However, it opted to be more dovish in its view in response to growing fears that rising commodities would adversely affect growth and demand. The pound is showing signs of indecision as it hovers below the 1.32 wall of resistance but may still achieve a winning week to a lesser extent.

How Fed's decision affects gold

Gold appears to have stalled its recent positive bounce after testing the monthly low of $1,895 earlier this week, with the post-FOMC positive move being halted near the $1,950 region. The decline was caused by modest US dollar strength, which tends to undermine demand for dollar-denominated commodities.

In the wake of the Fed's 25 basis point hike to its target fund rate on Wednesday, the greenback lost traction, as the Fed’s action disappointed some investors expecting an even more aggressive increase in borrowing costs. However, the Fed's hawkish outlook and the start of the policy tightening cycle helped prevent more profound losses for the dollar. According to the so-called dot plot, the Fed would be able to raise rates at each of the six remaining meetings in 2022 to combat persistently high inflation. This also helped keep the benchmark 10-year yield at its highest point since 2019, weighing down on non-yielding gold.

Moreover, Fed Chair Jerome Powell said the central bank would likely begin reducing its balance sheet as early as the following May meeting. Further, Powell noted that the economy was strong enough to handle tighter monetary policy and financial conditions.