Gold Jumps on Speculation Fed May Reduce Number of 2019 Rate Hikes

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.

Forex

Wednesday’s steeping of the yield curve helped make the U.S. Dollar a less-attractive asset. With the spread between the 2-year yield and the 10-year yield rising to 24 basis points from recent lows near 20, yield curve investors were forced to make adjustments to their positions. This drove up demand for interest rate sensitive currencies like the Euro, Australian Dollar, New Zealand Dollar and the Japanese Yen.

The EUR/USD surged on Wednesday, reversing earlier weakness, while turning the Forex pair higher for the week. A tightening of the spread between Australian short-term notes and U.S. short-term notes made the AUD/USD a more attractive investment. The same factors helped boost the NZD/USD along with increased demand for higher risk.

The USD/JPY was a little trickier to decipher. While the tightening of the interest rate differential drove up demand for the Japanese Yen, the increase was more than offset by a jump in demand for higher-yielding assets. In other words, with stocks rising, the carry trade kicked-in with investors borrowing in Yen then buying dollars to invest in the stock market.

Gold

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.