The Fed’s Powell and Inflation Will Drive Gold Prices

Gold prices rebounded in the beginning of the last week of February and remains at the top end of its recent trading range. Recent stronger than expected U.S. inflation figures were the catalyst for the rise in gold prices and could continue to be the underlying catalyst that keeps prices higher. Recent comments from new Fed chair Gerome Powell could allow inflation to continue to rise without slamming the breaks on monetary policy. Another factor which could alter the course of gold prices is confidence within the Eurozone. Not only have recent indicators such as the IFO and PMI’s come in weaker than expected, but political uncertainty remains which could weigh in on the price of the yellow metal.

January economic data showed two interesting situations that gold bugs should consider. The first is that inflation expectations in the U.S. are rising. The second is that confidence in Europe is edging lower.  Higher inflation expectations have come in the form of rising wages, which was reflected in the stronger than expected jobs report. This was followed by a stronger than expected U.S. CPI and U.S. PPI. At the same time, confidence indicators in the U.S. were weaker than expected. This helped buoy the dollar and weigh down on the Euro. The other reason for caution on the Eurozone is not so much the dip in confidence indicators, but lingering political risks. The German government is still not confirmed as Merkel’s coalition partner is waiting for confirmation from the party base. Brexit continues to hang over Europe and the Italian election is increasingly likely to cast a shadow over markets.

U.S. Rate Many Have Peaked Given Powell’s View

Fed’s Powell may accept a temporary overshoot on inflation potentially up to 2.5% after years of undershooting the target. This view is underlined by a quote from former Fed governor Meyer, who said “I’ve had some hawks on the committee surprise me and say they wouldn’t be worried about a modest overshoot” as long as that’s below 2.5%. The implication is that Powell could make some sort of reference to his patience.

Fedspeak will of course be anchored by Fed Chairman Powell’s rookie semi-annual address before Congress, which will take place during the last week of February. Though there will be plenty of other voices to consider, Powell’s initial comments may carry substantial weight.

Inflation Versus the Dollar

Rising inflation expectations are a double-edged sword and will help drive gold trading.  Higher U.S. inflation could initially boost prices of the yellow metal as investors purchase hard assets to hedge their exposure to higher inflation. At the same time, higher inflation expectations in the U.S. that are not offset by higher inflation expectations in Europe, could buoy the dollar. Since gold is quoted in U.S. dollars, a stronger greenback may weigh down on gold prices.  Traders will get to monitor both U.S. yields relative to European yields as well as the EUR/USD currency pair.  The combination of the two could help drive gold prices. Traders will need to track the greenback to determine if gold prices will be able to continue to rise.