Silver and gold followed major currencies such as the Euro and Japanese yen and declined again as the USD continued to pick up. This week’s FOMC meeting could bring gold and silver to a new year low if the FOMC were to take another hawkish tone and set the stage for a rate hike in the coming months. The FOMC will also release an updated economic outlook and a press conference will follow the FOMC statement. Other U.S. reports and events include: industrial production, housing starts, and Philly Fed index. In Europe we have: Targeted LTRO, ECB President Draghi speaks, EU Summit, BOE and SNB rate decisions, and EU CPI. Here is a preview for March 16th to 20th, 2015:
The upcoming FOMC meeting is likely to delve into the progress of the U.S. economy and could move again the prices of gold and silver. The main issue will be the wording of the statement and whether the term patience will be omitted. In such a case, this is likely to put a bit more upward pressure on long term yields – as the odds of a rate hike will slightly increase.
The table above shows the reaction of gold and silver following the past FOMC meetings decisions. As you can see, in four of the past five meetings the market reaction of gold and silver was mostly negative. Nonetheless, the current implied probabilities, have slightly declined to 40% chance of a rate hike in July and 58% of a rate gain in September. These numbers are modestly lower than the probabilities recoded in the previous week but are still higher than last month’s.
The FOMC will hold a press conference and provide an update to its economic outlook. Regarding the outlook it will be worth noticing the FOMC members’ updated expectations about GDP growth rate, inflation, and employment. The low oil prices and deflation pressures from other countries including Euro Area could reduce further the FOMC’s inflation guidance. This could also result in a change in the cash rate outlook for this year.
The recent rise in the U.S. dollar and expanding monetary policy of ECB, BOC and RBA could also be a factor that will be considered in the this meeting.
In Yellen’s last testimony, she addressed the weakness of China and the potential adverse impact it could have on the U.S. economy. She also talked about falling oil prices and its positive impact on the U.S. economy. Yellen also said that a rate hike isn’t likely to occur in the upcoming couple of meetings. A rate hike will be considered a “meeting by meeting basis”.
Besides this event, other U.S. reports that will be released this week include Philly fed index and housing starts. These reports, however, are likely to have little impact on bullion prices – unless they show a significant and unexpected change from current estimates.
In Europe, the next TLTRO will be auctioned to commercial banks. In the past two installments, the targeted LTRO didn’t reach the market expectations. This is another factor that could impact the size of ECB’s QE program – more targeted LTRO could result in less QE. Other reports to consider are German economic sentiment, trade balance, and EU CPI. If the Euro keeps falling against the USD, this could also drag down bullion prices.
By the end of the previous week, gold holdings in the GLD ETF fell again by 1% to 750.67; despite the recent decline in its gold holdings, its holdings remain up by 5.4% for 2015, up to date.
What’s up ahead?
One thing is very likely – the market volatility is expected to pick up again. The FOMC meeting could be a big event for gold and silver only if the FOMC were to change the wording and provide some new and updated guidance about the progress of the U.S. economy and next move about the rate hike. If the FOMC statement were to show a more hawkish tone and the outlook were to be more optimistic; then gold and silver could another beating. If the tone were to be more balanced or even dovish, then this could bring back up bullion prices. My guess is that the FOMC will take another step towards raising rates and set the stage for this scenario – i.e. gold and silver will have another harsh week. In any case, the high volatility is likely to remain put.
For further reading: