On Tuesday, New York Fed President, William Dudley, and some of his colleagues from the Fed made hawkish comments. What do they mean for the gold market?
Many analysts believe that Trump’s speech to Congress was overshadowed by comments from the Fed officials. What did they say? First of all, Dudley, who is a permanent voting member of the FOMC, told the CNN’s reporters that the case for tightening monetary policy “has become a lot more compelling” since the presidential election.
Similarly, San Francisco Fed President, John Williams, said that an interest rate increase was likely to receive “serious consideration” during the March FOMC meeting. Also on Tuesday, Philadelphia Fed President, Patrick Harker, repeated that he sees three rate hikes in 2017. And St. Louis Fed President, James Bullard, pointed out that the U.S. central bank has essentially achieved its dual mandate, so it should start to reduce its balance sheet. However, he was more cautious when it comes to the rate hike in March. Finally, on Wednesday, Dallas Fed President, Robert Kaplan, reiterated his view that rates should rise sooner rather than later.
As a result, the U.S. dollar and Treasury yields jumped, while market odds of an interest rate increase this month surged from 35.4 percent to 68.6 percent. As we wrote in February, the U.S. central bank is on track to raise interest rates, and March is a live meeting. This should be negative for the gold market.
The bottom line is that several Fed officials jolted markets into higher expectations for a March U.S. interest rate increase. It strengthened the greenback and made Treasury yields rise. Although gold rebounded during afternoon trading from the earlier daily lows, its fundamentals deteriorated: rising expectations of an interest rate hike, stronger greenback and higher yields may be a headwind for the yellow metal. Stay tuned!
Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.