Fed in the spotlight: Gold price nears $1,900, here’s what to expect next

(Kitco News) A highly volatile commodity sector continues to put pressure on gold as markets turn their attention to Wednesday’s expected 25 basis point Federal Reserve rate hike.

At one point on Tuesday, gold lost $50 due to falling oil and other commodity prices. Oil fell below $100, with West Texas Intermediate and Brent crude futures down about 5% on the day to last trade at $97.39 and $101.24 a barrel, respectively.

“It appears that the gold market has fallen victim to the abandonment of widespread securities trading. Gold prices are trying to find a floor and will eventually stabilize even if oil prices continue to fall,” said Edward Moya, senior market analyst at OANDA.

Meanwhile, the US stock market moved higher on a recovery in risk appetite, and gold moved closer to $1,900 an ounce. April Comex Gold futures last traded at $1,918.90, down 2.14% on the day.

“U.S. stocks are getting support for three reasons: growing economic and political pressure for a ceasefire in Russia, falling oil prices, and after a softer-than-expected PPI report and a disappointing Empire study confirming the idea of ​​​​a Fed victory. I don’t need to tighten policy aggressively over the next few meetings,” Moya said on Tuesday.

The focus now is on the Fed’s interest rate decision and central bank chairman Jerome Powell’s statement on Wednesday.

What is the Fed’s plan?

The Fed is expected to raise rates by 25 basis points on Wednesday afternoon, the first policy tightening since 2018. And this is already largely taken into account by the markets.

“The Fed made clear its intention to raise the federal funds rate by 25 basis points at its meeting this week and said balance sheet cuts (also known as quantitative tightening or QT) should begin by midyear,” said Comerica Wealth chief investment officer. Management John Lynch. .

Close attention will be paid to updated economic forecasts and scatter chart. ABN AMRO expects seven rate hikes this year as the risk of inflation outweighs the risk of growth, said Bill Divini, senior US economist at the Dutch bank.

“We expect inflation forecasts to be raised and growth forecasts to be lowered on the back of recent developments. Rate hike projections are likely to rise significantly from the three 2022 rate hike projections forecast last December, but likely not reach the seven hikes we now expect this year. “, Divini said.

ABN AMRO forecasts seven increases of 25 basis points this year, bringing the federal funds rate up to 1.75-2.00% by December.

One of the ongoing risks associated with the Fed’s tightening cycle is the impact on economic growth.
“The risk of a recession over the next 18 months is higher than before the Russian invasion, but the US economy is likely to continue growing, albeit at a slower pace than it seemed possible at the beginning of the year,” the head of Comerica Bank said. economist Bill Adams. “Comerica forecasts US real GDP growth to slow from 5.6% year-on-year in Q4 2021 to 2.0% year-on-year in Q4 2022.”

Fed Chairman Powell had already told Congress in early March that Russia’s invasion of Ukraine and new sanctions could have “unintended consequences.” Powell also stressed that “everything is so uncertain” and “at times like this” the central bank is acting “cautiously”.

Markets expect Powell to maintain this line of thinking during his Wednesday press conference.

In addition, any comments regarding the Fed’s plans to reduce its balance sheet may also affect the market. During his speech, Powell noted that Fed officials could use the March meeting to flatten a plan to cut the central bank’s balance sheet by nearly $9 trillion.

“We continue to expect the Fed to start allowing maturing bonds to be written off as early as May, initially at a rate of $15 billion a month, and eventually rising to $100 billion a month by September,” he said. Divini. “This is the maximum rate at which the balance can spin in a ‘passive’ manner.”

Could gold hit $2,000 again?

Gold could face another sell-off if geopolitical tensions continue to ease and the US central bank starts raising rates, strategists at TD Securities said. The key level to look out for is $1,914 an ounce.

“A break below $1,914/oz would catalyze a significant selling program. If the market has begun discounting a future in which the growth shock could dissipate faster than the inflationary shock, as we expected, then gold prices could be particularly vulnerable. to a more hawkish profile of the Fed, opening the door for deeper consolidation,” they said on Tuesday.

But if the war in Ukraine continues to affect market sentiment, gold could return to $2,000, Moya explained. “The war in Ukraine does not look like it will lead to any immediate de-escalation, and this should provide basic support for gold prices. If the FOMC decision shows that some policy members are holding back some rate hikes on the scatter charts, gold could get its retreat and rise again to the $2,000 level,” he said.

MKS PAMP has just revised its gold outlook upwards, expecting prices to average $2,000 this year, citing changes in its macroeconomic assumptions.

“Originally we thought a stagflationary backdrop would support gold (due to COVID, some zero COVID policies, supply chain risks, etc.); this backdrop is accelerating due to the growing risk of a hyperinflationary depression in Russia and a recession in the region. / Europe. Structural and ongoing regime change—from globalism to isolationism and related domestic trade policies—is exacerbated by this war and fuels inflation. There is also a disturbing trend that the global monetary and payment system and wealth are now politicized. and weapons,” said Nicky Shiels, Head of Metals Strategy at MKS PAMP.

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