Markets and economists are in agreement that the Fed will hold rates unchanged at the upcoming meeting on Wednesday. Not only that, but the odds of a rate hike at the subsequent meeting in March are just 14%. If the Fed delivers on expectations, the market could take the decision in stride. But there are multiple factors that could cause a strong reaction to the markets on Wednesday.
Traders are taking not of the meteoric rise of Gold ( XAUUSD ) since the start of the year, which is usually intimately related to Fed policy. A turn toward hawkishness, or even less dovishness, generally weighs on gold prices. And that might be the case now, but other factors have continued to push the yellow metal higher. As of Tuesday, gold has gained over 18% since the start of the year, the best performance in over 40 years. And many analysts are suggesting that the price could go even higher.
Gold Up, Dollar Down Ahead of the Fed
Over the last month, the markets have gone from expecting a rate cut in March to nearly completely pricing it out, a notable hawkish shift in the outlook for the Fed. Normally, this would strengthen the dollar and weaken gold, but the opposite has happened. Geopolitical events and rising uncertainty have left traders selling dollars and fleeing to the safety of gold.
One of the largest buyers of Gold ( XAUUSD ) is China, both by the government and private citizens. Demand has remained robust despite the rise in prices, and dealers suggest there is further upside to the yellow metal. Societe Generale also predicts gold to rise, albeit at a relatively modest rate given recent performance, to hit $6,000 per ounce by the end of the year. Just two weeks ago, strong profit taking suggested that gold might have been near its top. But US President Donald Trump’s efforts to acquire Greenland with tariff threats on European allies saw renewed interest in Gold ( XAUUSD ), and dollar selling.
More Geopolitical Uncertainty Looms
Now that the tensions over Greenland are seen easing, US defense officials disclosed that a carrier strike group has moved into the Middle East to give the President more options on Iran. Protests in the oil-rich nation have been going on for months, and the move suggests a military strike isn’t completely off the table. Crude prices have not risen significantly, however, as Kazakhstan announced that production would resume a Tengiz.
Politics are once again adding to market uncertainty, this time stateside. After recent events in Minnesota involving immigration enforcement, House Democrats are threatening to hold up funding to pressure for changes to DHS policy on migrants. This has raised the spectre of another partial government shutdown.
What to Look Out For
Given the strong consensus around the outlook for policy, the focus will likely be on Fed Chair Jerome Powell’s post rate decision press conference. He has been relatively quiet on monetary policy since the start of the year, which heightens interest in his views. In the past, he has surprised markets by adopting a more hawkish stance, expressing concern about inflation. On the other hand, if he talks more about the jobs market, then markets could see him as conveying a more dovish message.
What could move markets more is if Trump announces his proposed successor to Powell. It’s widely expected to be a dovish candidate to support the President’s wish for lower rates. Current odds favor an outsider, Rick Rieder of BlackRock, over prior favorites Keven Warsh and Christopher Waller, who have experience at the Fed. Any surprise in the nomination could prompt a market reaction
