Yesterday was a massive day in the markets as we saw the FOMC statement & economic projections from the Federal Reserve. Rates were left unchanged with quantitative easing also being left unchanged at $120bln . The Fed’s stance remains accommodative and there has been further reiteration that we will have future guidance well in advance of the FED tapering QE & raising rates. This brought light to the market as we’ve seen strength in the stock market and commodity markets.
Jerome Powell sees moderate inflation in the short term however he emphasises this will not be constant. One of the data points showing this is the change in GDP forecasts. 2021 Forecasts have ballooned to 6.5% compared to the 4.2% December projection. This shows massive growth however, the year following has only been revised up by 0.1% & 2023 actually being revised lower. The Fed doesn’t see inflation as they do not see GDP overheating after 2021.
Another data point to be mindful of is the Dot Plot. This represents the view of policy makers for the rate target range for year end. In the prior Dot Plot, policy makers believed rates would remain unchanged throughout 2021, with 1 member seeing a raise in rates in 2022 and 5 policy makers seeing rates rise in 2023. This data can be seen below:
This data has now been updated as of yesterday with a few adaptations to viewpoints. We have now seen 3 more policy makers project rises in 2022, 2 more in 2023 and 1 in addition to the longer run. Powell did however state that this isn’t too influential as it is a bias that can change with time. Powell states we will see modest inflation but he cannot forecast rate changes. The Fed wants inflation to run moderately above 2%.
“Talking about inflation is one thing, actually having inflation run above 2% is the real thing. The Fed maintains the stance of wanting max employment and stable prices before adjusting the monetary & fiscal policy. The majority consensus for rate hikes remains in 2023. Powell is more focused on employment than inflation at this point and is okay with seeing inflation above 2% without hiking rates as with lower rates, the government can pay off debt at a cheaper rate.
Gold being an inflation hedge as well as being an attractive investment during times of low rates and quantitative easing, is now being eyed out by institutions as we bounce off the significant level of $1700. There was fear around a surprise taper & what the Fed would do with regards to rising inflation, however investors are left less shaken up as Powell continues to reiterate forward guidance, communicating well in advance of tapering QE & hiking rates.
Looking at the weekly timeframe, we have seen the metal lose its shine over the past few months. Price has now reached significant levels and bounced back as we spike into liquidity regions and close above the psychological key level of $1700. This was also the 3rd touch at the bottom end of the channel.
Analysing the daily timeframe, we have used the eclipse tool to hi-light the rejections off the bottom end of the channel. After seeing a daily closure below $1700, many traders were drawn short as we tapped into the liquidity region & closed back above, forming a fake-out of support. We then saw a retest of $1700 as support after hovering above for a couple days. This upside move coincides with the DXY downside. Price is now at a level of resistance around $1740 as well as a daily descending trend line. Closures above this level & the trend line will enable an upside leg into $1780 with the top end of the channel around $1850. Breakouts below the channel will allow for extended downside into the $1600 handle.
Monitoring the 4HR, we have clear price action showcasing the trend line break followed by break of structure to the upside. After creating new highs yesterday, we have since seen a pullback into our first level of support. Should we see this level maintain around $1740, we can continue higher, a break below will allow a push into $1730 and $1712 respectively. A fib can be applied from the HL to HH annotated above to find retracement levels upon a break of $1730.
Above, we have marked up the hourly timeframe, where we can see a lower timeframe fibonacci setup. Price was consolidated sideways in anticipation of the FOMC. Seeing positive remarks, we have now broken out to the upside and begun to retest. This hourly fib is the first level to look at as we have the 78.6% as a last point of call before we push into lower territory. There is also potential for a “double dip” and a push lower before resetting and continuing back into the highs.
Fundamentally, we have the Philly Fed Manufacturing Index & unemployment claims coming up at 2:30PM. As always, exercise risk management & be mindful of all the factors above. For updates directly to your email, subscribe to our blog and we hope you have a great week further!