David Jones, Chief Market Strategist at European investment trading platform, Capital com, said: “It’s been a big week for broader economic themes and central banks. UK inflation was 2.1% in May, above the Bank of England’s target for the first time in a couple of years. Investors had become increasingly concerned about inflation in recent months, causing some stock market volatility in the short-term, but not really affecting the direction of travel for most markets. “We had seen clients happy to buy into the likes of gold and silver on dips, perhaps viewing these as a useful part of their portfolio, as a traditional hedge against rising prices in the wider economy.
“But the bombshell for markets came on Thursday from the US central bank, the Federal Reserve. It said that it expects to raise the US base rate earlier than expected – but still not till 2023.David Jones, Chief Market Strategist at European investment trading platform, Capital com
“Now, many people will think investors these days are short-term focussed and would not be too concerned about the possibility of rates rising two years down the line. But this signal from the Fed resulted in more market volatility than has been seen for many months.
“Those who had bought gold as a hedge against the spectre of inflation saw the price plunge by around $100, or 5%, over the next 24 hours as the US dollar surged. The price of oil, which has soared this year by 50% as traders bet on a strong economic recovery, also suffered from a stronger dollar.
“Markets can often over-react to central bank statements. Although stocks initially fell, US markets regained their composure again on Thursday and the tech-biased NASDAQ index actually moved out to fresh all-time highs. However, other markets were still reeling from the threat of this sooner than expected rate cut.
“It will be the US dollar that will be the focus for traders for the rest of the month as they wait to see if this really is a resurgence for the world’s reserve currency – and the knock-on effect it will have for many other asset classes.”