Fed Chair Jerome Powell’s words had an impact on all sectors of the financial markets – Interest Rate, Equity, Commodity and Currency on Wednesday. This serves as further proof that U.S. interest rates influence all markets. Study the movement of the Treasury market because it dictates the direction of all the major sectors.
Powell moved the yield curve on Wednesday after he took a far more dovish tone than he did about two months ago when he said rates were a long way from neutral. Today’s comments were closer to the dovish tone Vice Chair Richard Clarida took during the week-ending November 16. Today’s price action indicates investors finally believe that the Fed is getting closer to neutral.
With Powell saying the economic outlook remains “solid”, a rate hike in December appears to be a done deal. However, he acknowledged the effects of higher rates take time to show up in data. This leads investors to conclude that the Fed is likely to reduce the number of rate hikes or even stop them next year.
Gold surged on Wednesday as the dollar plunged in reaction to Fed Chair Powell’s dovish comments. Traders reacted as if Powell was signaling there would be fewer rate hikes in 2019, which would theoretically boost the value of gold because it is seen as a hedge against inflation.
For most of the year, gold prices weakened on the idea that rising rates would make it a less-desirable asset since it pays neither interest nor a dividend. Furthermore, the strengthening U.S. Dollar was weighing on gold’s appeal as a safe-haven asset. Additionally, the strong greenback reduced foreign demand for the dollar-denominated asset.
Conditions began to change in mid-August and since then gold has been rangebound. However, today’s news may create enough upside momentum to fuel a technical breakout to the upside if buying volume continues to increase.
(source:fxempire.com)
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