Fed Day: Where to for Gold, Silver?

• 98% consensus for 25-bps hike means gold, silver to dip before Powell comments
• Fed chief’s outlook on rates will tell if another hike due before the end of 2023
• While another rate pause is seen as highly unlikely, Fed could still surprise

Whichever way the Fed leans today — a 25 basis point hike or another pause — there will be consequences for risk assets from the dollar’s response, with precious metals led by gold and silver possibly showing the most magnified reaction among commodities.

In one of the most unified consensus on what the Federal Reserve is likely to decide for July interest rates, the odds for a hike stood at 99.2% in the morning previous to the announcement.

Indeed, if the Fed decision, due at 14:00 Eastern (18:00 GMT), shows a quarter-point hike for this month, expect stock, energy and metals prices to take a brief hit before they quickly calm to focus on the “real event” of the day — Chair Jay Powell’s outlook on rates going forth. 

That’s because since the possibility of a July rate increase gained traction a month ago, there had always been the likelihood of two hikes before the end of the year as per the Fed’s dot plot projections. 

Powell admitted as much in June — during the first pause of a 15-month hike cycle — that the combination of GDP, labor, wage and consumer data will guide the Fed hereon. But he also said the overarching objective was to get inflation back to the long-term target of 2% per annum. On that score, the 3% annual reading for the Consumer Price Index in June showed the central bank had more work to do — though last month’s CPI growth itself was the slowest in two years.

But if the Fed maintains its hold on rates, on grounds that natural forces of the economy will right the situation, expect an immediate across-the-board rally in risk assets. With almost everything from stock to oil prices extending their highs, the new inflationary pressure that will be created could just make the central bank’s work a lot harder, making it an implausible scenario that its Federal Open Market Committee would want. But the FOMC isn’t just Powell and it could still lean the other way during a vote.

The following is the potential path the Dollar Index, gold and silver would likely take in the event of a 25-bp hike or pause:

Dollar Index

Dollar Index Daily Chart

The broader action of the Dollar Index has been bearish, hovering below the Monthly Middle Bollinger Band of 102.82, as well as the 5 Month EMA, or Exponential Moving Average, of 102.25.

The recent rebound from 99.22 lows paused with Tuesday’s potentially bearish ‘doji’ mark after approaching the Daily Middle Bollinger Band of 101.38.

• 25-bps Hike:

A 25-bps hike, which is largely priced in, is expected to support the dollar’s return toward the 50-Day EMA of 101.80 followed by 100-Day SMA 102.24 resistance.

• Rate Pause:

If the Fed decides to extend its June pause on rates, the dollar will almost certainly extend its natural correction toward the parity of 100 it has established a toehold on.

If this 100 parity breaks, as expected, support for the Dollar Index could immediately drop to 99.20 first and later to the 50-month EMA of 98.97.

Spot Gold

Spot Gold Daily Chart

The spot price, as well as futures, of gold have largely traded sideways since June, despite clinging to the key $1,900 per ounce support.

With spot gold, which is more closely followed for charting purposes, the action has been within a $16 narrow range comprising the Weekly Middle Bollinger Band of $1,968 and the interim resistance and the 5-week EMA at the $1,952 interim support.

Further course of price action hinges on a breakout above or below the aforementioned zone, which awaits the Fed's rate decision — be it a 25-bps hike or extended pause.

• 25-bps Hike:

If the FOMC announces a 25-bps hike, expect spot gold to break below the $1,952 level, followed by a quick return to the horizontal support of $1,945.

If this level gives way too, gold bears could emerge in numbers to try and take the price down to $1,930 and $1,915.

• Rate Pause:

An FOMC decision to leave the key U.S. rate unchanged through its next rate decision on Sept. 20 will help gold break above the $1,968 barrier, extending gains to the recent swing high of $1,988, followed by the next upper legs of $1,998 and $2,009.

Spot Silver

Spot Silver Daily Chart

The long-term monthly structure of spot silver continues to maintain strength above the 5-month EMA of $23.67 per ounce, while the mid-term weekly structure keeps gains capped temporarily following the previous week's bearish closing.

• 25-bps Hike:

A rate hike might actually be supportive for silver if the rising dollar improves economic sentiment, increasing industrial demand for the metal. Stability above $23.83 will help silver ascend and break the previous week's high of $25.28, followed by next legs higher of $26.15 and $26.96.

However, falling gold can have a correlated impact on silver, causing sideways movements within the 100-Day SMA of $23.83 that acts as support. Breaking below the zone will eventually extend spot silver’s drop to the 200-day SMA of $23.

• Rate Pause:

If the Fed holds rates, spot silver could exhibit momentum for sideways action, with a temporary rebalancing towards the support zone of $23.83, followed by a resumption of the uptrend targeting the aforementioned resistance of $25.28, followed by $26.15 and $26.96.

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Disclaimer: The content of this article is purely to educate and inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables.