Gold on a Knife Edge Ahead of FOMC Decision

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%.

Despite a geopolitical backdrop fraught with risks from the growing tensions on the Korean Peninsula to the beginning of election season in Europe kicking off with  Dutch votes, gold is currently far more sensitive to the developments in the US dollar for the time being. Evidence of this comes from the correlation coefficient between the two assets. At -0.8017, the coefficient indicates a strong inverse relationship between the price of gold and movements in the US dollar index, meaning any dollar appreciation will likely be met with gold depreciation. Once the specter of the Federal Reserve fades after the imminent decision, gold’s sensitivity to fundamental developments will likely resurface, potentially fueling a risk premium.

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Gold Back on the Retreat Heading Into the Decision

While gold prices have slipped back below the longer-term $1200 level, there remains a degree of skepticism amongst market participants about the barbarous relic’s next move as trading volumes dry up ahead of the Fed decision. On a longer-term basis, gold prices have been consolidating within a symmetrical triangle formation for the better part of the last year. After bouncing off the prevailing downward trend line and the 200-day moving average, gold has since fallen beneath the 50-day moving average as well, trending in the middle of the consolidation. The most recent retreat in prices however may be more indicative of a technical correction than reversal lower in prices.

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Evidence of this viewpoint comes from the oversold Stochastic Oscillator. Should the %K and %D lines cross back above the 20.0 oversold threshold, it could be an early indication of a rebound in gold prices. Nevertheless, should fundamental developments not turn in gold’s favor, a Stochastic Drop, where prices continue to sink despite trending in oversold territory is possible. One of the key determinants of direction will depend on whether gold prices drop below support at $1188. Any move beneath this level would largely suggest a reversal from multi-month uptrend and a continuation of the prevailing longer-term downward trend.

What Binary Options Traders Should Watch For

The most pertinent data for gold prices is waiting in the wings as the Federal Open Market Committee concludes their two-day meeting. A more hawkish position taken by the Board of Governors could be indicative of further rate hikes in the coming quarters, adding to the upside potential in the US dollar which would likely cut demand for gold. However, if a rate hike is delivered without hints about the future of monetary policy, gold prices may move horizontally for the foreseeable future, continuing to trend within the consolidation. Any surprise move not to adjust policy could also result in a steep rally in gold prices. However, with a rate hike nearly assured, the near-term balance of risks remains to the downside for gold prices.