Gold Ignores Lower Dollar/Oil to Focus on the Fed

Since the start of March gold has been reacting to increasing inflationary pressures caused by the rise in crude oil prices. The elevated oil prices have caused traders to anticipate at least one interest rate hike by September flipping expectations that had been expecting rate cuts this year. 

The spike in oil prices was compounded by Chairman Warsh’s somewhat hawkish tone at his first FOMC meeting as Fed Chairman and traders are split on his decision due tomorrow. The two thirds majority sees rates being held at current levels of 3.50% – 3.75% while a third of futures traders see him announcing a quarter percent hike which would bring the fed funds rate to 3.75% - 4.00%. 

These expectations for higher interest rates have helped bring the dollar index to its highest level in 14 months directly weighing on gold prices. The combination of higher oil prices and a stronger dollar have caused gold to trade in a bearish triangle for the past five months. Over the past five months the dollar index has risen by approximately 3.8%.

 Despite crude oil and the dollar index both declining today gold moved lower most likely this was traders pricing in the chance of a rate hike being announced at the conclusion of tomorrows FOMC meeting.

Gold has been unable to break out of this descending triangle pattern ever since the inflation narrative brought on by the war in Iran began on February 28th. So far gold has lost 22% since the start of this conflict, an unusual reaction from a metal that has traditionally benefited from geopolitical tensions. The new dynamic driving gold is tied to all the things we mentioned above and is unlikely to change until an unwinding of interest rates or expectations of such come forth. 

Tomorrow’s rate decision could be pivotal to the precious yellow metal near the apex of its descending triangle pattern. An increase of the federal funds rate would most certainly cause a break of crucial support sitting around $3,900. Even if rates are left where they are support could be tested if the Fed’s language is perceived as hawkish while a dovish sounding Fed could possibly propel gold above its descending resistance line for the first time in five months. Either way Gold is very near its apex formed from lower highs above and a double bottom below and could easily break out of it tomorrow.

Wishing you as always, good trading,