Anyone who bet on gold going higher because the Fed was considering reducing the number of rate hikes at this week’s Federal Open Market Committee meeting was burned last week as the precious metal plunged in reaction to a surge in the U.S. Dollar to a 19-month high against a basket of currencies.
Last week, February Comex gold settled at $1241.40, down $11.20 or -0.89%.
The price action in gold last week was primarily driven by a rally in the U.S. Dollar. After posting a potentially bearish closing price reversal top on Monday, following a test of a five-month high, gold consolidated until Friday when bad news from China and the Euro Zone drove global equity markets sharply lower.
The steep drop in stock prices prompted investors to seek shelter in the safe-haven dollar, leading to a drop in demand for dollar-denominated gold.
It’s All About the Dollar…
The U.S. Dollar was the big winner in the Forex market last week, but the move wasn’t driven by a strengthening U.S. economy, but rather a grim outlook for the global economy. U.S. inflation and retail data came in as expected and investors continued to position themselves ahead of this week’s Fed interest rate and monetary policy decisions. This helped underpin the greenback. However, it was geopolitical concerns over Brexit, and signs of a weakening economy in China and the Euro Zone that drove the dollar to a new high for the year.
The U.S. Dollar Index rose to a 19-month high on Friday, as political and economic news outside the U.S. continued to drive up safe-haven demand for the greenback.
In the U.K., the British Pound tumbled as investors worried British Prime Minister Theresa May was struggling to secure assurances from the EU over her Brexit withdrawal deal.
The Chinese Yuan fell against the U.S. Dollar after data showed retail sales in the world’s second largest economy grew in November at their slowest pace since 2003 and industrial output rose the least in nearly three years. The Euro lost 0.80% against the U.S. Dollar last week after European Central Bank President Mario Draghi announced lower growth forecasts. Draghi said 2018 growth in the Euro area was expected to be 1.9 percent rather than the 2.0 percent forecast in September. In other news, the Euro fell after IHS Markit’s Flash Composite Purchasing Managers’ Index slumped to 51.3, its weakest since November 2014, from a final November reading of 52.7.
This week’s price action will be fueled by the U.S. Federal Reserve’s interest rate and monetary policy decisions, the FOMC economic projections and the outcome of Fed Chair Jerome Powell’s press conference.
Look for a 25 basis point rate hike from the Fed on Wednesday. As recently as September, the Fed came out as a little too optimistic about the economy for next year. At its December meeting, the Federal Open Market Committee is expected to tweak its economic forecast. It may also express some concerns over global growth. Fed Chairman Powell is also expected to hold a post-announcement press conference. At the briefing, he could discuss Fed officials’ concerns about the impact of trade wars and possibly financial conditions.
How Powell Can Influence Gold Prices
Powell’s comments should move the gold market, but here’s where things get tricky.
Theoretically, if Powell is dovish then look for Treasury yields and the U.S. Dollar to weaken. This should drive up demand for gold. If stocks rally on the news and this encourages dollar investors to shed safe-haven positions, then look for gold prices to accelerate to the upside.
If Powell is too dovish, or if he signals a weakening economy then stocks could plunge. This will send investors into the safety of the U.S. Dollar. The higher dollar will make gold a less-desirable asset and prices will tumble.