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Gold Tests $1,200/oz on Fed Day

March 15th, 2017 by

The precious metals clawed back some of yesterday’s losses on Wednesday morning. Virtually everything in the markets today will hinge on the decision by the Federal Reserve Open Market Committee (FOMC) about whether its target interest rate should go up this month. The central bank will announce its decision and publish a statement that explains their reasoning and provides some forward guidance at 2 pm EST today. This will be followed by a press conference with Fed Chair Janet Yellen at 2:30.

Spot gold and spot silver were slightly off their morning lows, hovering above the key support levels of $1,200/oz and $17/oz, respectively.

Fed Day Arrives

As is typical for the conclusion of an FOMC meeting, trading will come nearly to a standstill in the anxious hours before the central bank makes its announcement. This happens regardless of how confident the markets are that the Fed will take a particular course of action. It doesn’t matter so much that the Fed rarely surprises anyone; until a policy change is officially announced, traders and investors are stuck in a bit of limbo. Nobody wants to get caught on the wrong side of a trade on account of misreading the temperature of the FOMC.

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While the Fed is overwhelmingly expected to raise rates this afternoon, its statement will probably be more dovish in order to temper any potential fallout from the move toward tighter monetary policy. Each word of the statement will be parsed and analyzed as the day unfolds, naturally.

One area that will get a lot of attention is the U.S. dollar. Higher rates are generally a sign that the greenback is going to appreciate, as well. This has actually been one of the main concerns of the FOMC: If possible, it would like to avoid pushing the dollar too high, which would place a drag on U.S. exports and cause the trade deficit to widen. This morning, the DXY index was about 0.1% below unchanged to 101.6.

Stocks opened higher in the U.S. The chances are good, however, that equities trend sideways ahead of the FOMC announcement. European shares were slightly higher while Asian markets were mostly flat overnight. Bond prices rose slightly as the 10-year Treasury yield slipped 2 basis points to 2.58%. The narrow spread between the 2-year T-note (1.38%) and the 10-year note is a sign that inflation expectations have yet to catch up with the gradually rising pace of inflation observed “on the ground.”

Oil, Taxes

Oil prices finally posted gains on Wednesday as volatility returns to the energy market. Both global price benchmarks for oil were more than 1.3% higher in early trading. The volatile swing back is somewhat surprising, given that Saudi Arabia revealed that it cut far less from its crude production in February than in the previous months. As the biggest player within the oil cartel known as OPEC, the Saudis had been making deeper cuts so that the other member countries could make more modest cutbacks.

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Another major headline this morning is the leaked report that purports to show a portion of President Donald Trump’s 2005 tax return. Trump’s refusal to release his tax returns has been a modest (albeit lingering) issue for the new administration. The two main takeaways from the leaked document are that 1) the president paid an effective tax rate of about 25% on over $150 million in income that year; and 2) he also incurred a loss of over $100 million that related to a nearly billion-dollar writedown of losses from the previous decade.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.

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