Gold awaits Fed’s decision

Monetary policy

Markets are awaiting Fed´s decision about rising interest rates this week. Fed´s monetary policy is one of the most important fundaments, which could significantly affect almost all markets. Monetary policy of the state is predominantly used to keep the state´s economy in balance. So if there is a need for changing this balance, central bank must react to this. And high inflation is ´the need´, for every economist. Economic calendar shows that central´s bank decision is planned on Wednesday at 20:00 CET, followed by very important press conference at 20:30 CET. 

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Expectations

The main tool to fight high inflation is rising interest rates. Market expects 50bp rise on main interest rate from 0,5% to 1%. This scenario could strengthen US dollar, additionally, assets denominated to USD could depreciate. Gold is a little bit different, because this commodity has no interest.

Therefore, rising interest rates could bring the situation in which financial assets with interest seem to be more attractive than precious metals. Losing competitiveness to interest-related assets and strong dollar can have negative effects on gold price. In the chart below one can see that gold has lost around 10% since Fed has risen interest for the first time and stated that there will be more rising during this year.  

1-hour chart of GC, Negative price development. Source: tradingview.com

Other possible scenarios 

Firstly, let’s imagine there is a lower rate hike than expectations. This could infuse more optimism to gold veins and precious metal could go up. Secondly, is the decision is above expectations, meaning the rate hike is higher than 0,5%, we can expect a shock to markets and possibly another price fall. 

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High volatility alert

Expected data of the next meeting on Wednesday has been well known for some time, and markets had a lot of time to include those expectations to the prices of assets. Moreover, after data revelation there is a press conference, which could uncover another steps of monetary policy for this year. Therefore, extremely high volatility is expected, and price could go illogically to either direction. Staying away from trading during data revelation is the best you could do for your portfolio.