With just hours left until the United States Federal Open Market Committee unveils its latest monetary policy decision, gold prices are consolidating just above the key psychological level sitting at $1200 per troy ounce. In what may prove to be a pivotal moment for the precious metal, much hinges on the upcoming announcement as the Federal Reserve works to build its case for gradual increases in the Federal Funds rate. While markets are considering a rate hike a near certainty, the real question remains as to whether two more subsequent increases are going to be delivered before the end of 2017.
Although the language is unlikely to be extremely hawkish, the FOMC statement and press conference may provide market participants with valuable hints about the outlook for policy over the medium-term. Furthermore, a new set of economic projections should help traders and investors alike divine the Fed’s position on additional tightening and whether the Central Bank will contemplate shrinking the burgeoning balance sheet or not. Considering the sheer amount of ambiguity heading into the decision, gold prices could very well move in either direction depending on the outcome.
Inflation Contrasts With Likelihood of Rising Rates
Data released earlier in the session by the US Bureau of Labor Statistics pointed to inflation rising to its highest point since March of 2012 as the resurgence in energy prices pushes the headline consumer price figure higher. The annualized CPI reading of 2.70% through the end of February met expectations, while climbing well past the Federal Reserve’s 2.00% inflation target. However, headline CPI is not necessarily the best reading of inflation, especially when accounting for the fading effect of energy price gains. The more pertinent core inflation figure, which strips away the more volatile energy component came in at 2.20%, still above the Fed’s target while underlining the stable price pressures.
Gold is typically sensitive to higher inflation given its historical use as a hedge and store of value, especially against the gradual depreciation and devaluation of fiat currency thanks to inflation. Nevertheless, the reaction from gold prices to this inflationary development has been nonexistent, owing in large part to speculation that the Federal Reserve’s forthcoming tightening is likely the second move of many to come over the course of the next 6-9 months. At present, besides the high probability of a decision to raise rates later in the session, markets are pricing in a higher likelihood another increase in June. According to the CME Group’s FedWatch tool, the probability of a June rate hike now stands at 55.70%.
