The gold market is being hit hard Monday as the new trading week gets underway. Investors may simply be getting a little spooked about this week’s Fed decision on interest rates Wednesday. In addition to the Fed, there are several other central banks meeting this week that could also affect markets. Both the Bank of England and European Central Bank are meeting this week on Thursday. Both are expected to raise their key interest rates and heighten rate guidance for 2023.
Expectations for the U.S. Federal Reserve have changed in recent weeks. The markets now expect a smaller rate hike this week, 50 points, compared to the previous several rate hikes of 75 points. Fed Chairman Jerome Powell could strike a hawkish tone, however, as he may want to prepare markets for rates remaining higher for longer. Many still believe the Fed Funds Rate will top out at 5% or so and that the Fed will begin cutting rates before the end of 2023. Powell may seek to even out expectations for the Fed in the year ahead by sounding more hawkish than expected.
In some recent commentary from Chairman Powell, investors largely felt he was more dovish sounding. Powell did state that the Fed is in no hurry to begin cutting rates, but that rates may need to stay higher for longer to get inflation under control. Stocks and gold both rallied on the commentary which was taken as being dovish. Powell may now wish to adjust those expectations and could do so through his commentary after the Fed meeting.
The ECB could also affect gold this week if it takes a more hawkish tone. ECB President Christine Lagarde could take a more hawkish tone, and if so, that could strengthen the euro while weakening the dollar. Such a scenario could be bullish for gold as the recent dollar strength has been a major factor blocking the path to higher gold prices.
Markets are likely to focus their attention over the next few weeks to the new year rapidly approaching. Whatever the Fed does or says this week may not be as much of a factor for markets as what the Fed plans on doing through 2023. Tuesday, markets will also get the latest data on the Consumer Price Index. It is expected to show a rise of 7.3% year-over-year. Any miss in the inflation data could send risk assets higher, while a reading that exceeds expectations could have the opposite effect. While it may not affect the Fed’s Wednesday decision on rates, Tuesday’s CPI data could have an impact on future decisions regarding monetary policy.
For the time being, the gold market may be just seeing some good, old fashioned profit taking today following recent gains. The bulls need to take out the $1800 level on a closing basis, however, to build a path forward for more upside. The bears will try to produce a close below the $1700 level to get more downside going.