Good morning, traders; welcome to our market week preview, where we look at the economic data, market news, and headlines likely to have the most significant impact on the price of gold this week and beyond, as well as other key correlated assets.
Following a tumultuous kick-off to the week, late Monday morning sees gold spot prices rallying from early lows as the US trading session balances out some of the overnight sessions’ over-extended trendlines.
This week’s early back-and-forth is almost certainly a result of investors trying to square positions with their expectations for not only how the Fed will act later this week, but what they will signal for the remaining weeks of 2022.
US Economic Data to Watch
Our preview post looks a little different this week because there is, effectively, only one game in town. Not only from the perspective of the gold market, but most major financial assets that to a great deal (if not the majority) of their trading in the US. Sure, there are a couple of second or third-tier data points scattered throughout the week; there are even monetary policy decisions expected from the Bank of Japan and the Bank of England. Still, we gave some serious thought to whether we would be justified to just copy-and-paste “Wednesday Fed Day” however many times it takes to fill a page, and call that a job well done.
Wrapping up the usual two-day meeting at 2 pm EDT on Wednesday, the FOMC is expected to announce a third-consecutive policy rate hike of +0.75% (challenging Chair Powell’s description of the first 75 bps hike as “unusually large”) in a continued, aggressive effort to tamp down on inflation in the US economy. Half an hour after the decision and a statement from the committee are released, Chair Jerome Powell will take the podium for his usual Q&A press conference. Alongside the FOMC’s statement, the central bank will release its updated projections for important factors like inflation, GDP, and the path of interest rates in the near- and medium-term.
Assuming that the Fed delivers the expected hike, we can anticipate this being a negative event for gold prices, as the US Dollar is likely to its run to some of the highest levels in two decades, and from a fundamental standpoint higher rates (meaning higher yields) drives a negative environment for gold. We’ll also expect to see US stocks, and really any major asset that trades counter to the Dollar, weaken on Wednesday’s announcement. Just how rough of a day gold (and others) get on Wednesday will depend to some extent on how much the news has been “priced-in” by that point. As we said, the shift in that direction has already been observed in gold’s weak start.
Because, following last week’s disappointingly hot inflation data set, markets seem to have mostly decided what it going to happen in the FOMC this week, the focus of any questions or parsing of comments—and the source of any real volatility this week—will be on the Fed’s next move. Despite the hand-wringing that followed last week’s CPI, there’s still a clear split between the top Fed analysts over whether the central bank will look to continue at this super-fast pace in November, or to mellow the curve out with at 50- or 25-basis point hike. If the FOMC were to nudge market expectations in either direction this week, the most impactful place for them to do it would be in the committee’s joint statement; but that would be seen as the Fed clearly planting their flag and so it’s also the least likely thing we would see the central bank do. Shifts in the Fed’s outlook(s) for the economy, as reported in the Staff Economic Projections, may give us some indication of how the FOMC, as a body, expected the rest of 2022 to play out. The right run of questions in the post-meeting Q&A may lead to some hints and signals from Chair Powell. For this reason, we think it’s more likely that we see the biggest jump in volatility (in the gold spot market, the US Dollar, and elsewhere) in the hour or two following the FOMC’s announcement, as opposed to immediately after its release.
Similar to last week, the remaining trading days may be a blank-space period where investors and other market participants work through their feelings and new expectations in the wake of what comes down on Fed Day. The only real moment of note later this week is a scheduled heavy-hitter appearance on Friday afternoon by Chair Jerome Powell, Fed Vice Chair Lael Brainard, and Fed Governor Michelle Bowman. While the event is not specifically geared towards discussing (forthcoming) monetary policy, we could get an unusually active Friday afternoon, depending on how the markets react to commentary from three top FOMC officials.
And that’s how the week lays out ahead of us, traders. As always, I wish you all the very best of luck in your markets in the coming days, and I look forward to seeing you all back here on Friday for our market-week wrap-up.