How Will Gold and Oil Move If the Fed Halts in June?

• Speculation is growing about a possible pause in June on the Fed’s decision to halt rate hikes
• The Fed’s upcoming FOMC meeting will be closely watched for signs of future policy action
• The impact of the Fed’s decision on the dollar and Treasuries will be important catalysts for movement in markets, including commodities such as gold and oil.

Pressure is mounting on Jay Powell and other members of the Fed to decide when to end rate hikes for more than a year. The Federal Open Market Committee, or FOMC, may begin revealing what each market expects, from Treasuries to stocks and commodities.

Although the possibility of a pause in rate hikes has been discussed for months, news published in the Wall Street Journal this week brought the issue to the fore, saying that the Fed’s tightening process, which began 15 months ago, will probably be halted. the sixth month. This will come after a May 3 quarter hike that will push interest rates from just 0.25% at the start of the crisis to a peak of 5.25%.

As Nick Timiraos, the Journal’s chief economist, points out, how close the Fed is to the endgame on interest rates will be clear after this FOMC meeting, as officials think their communication about future policy actions could be important. as well. as individual levels change.

“So far, the Fed has been looking for clear signs of slowing and slowing inflation to justify a pause. But after this week, the calculus may turn. Policymakers may need to see stronger-than-expected signs of demand and inflation. continue to raise standards.”

For economists, market participants, financial strategists and Fed reporters, this means that it will be necessary to read in more detail than usual for the usual post-meeting statement from the central bank explaining its rate decision in a few short sentences. about the near term. policy direction. It will also mean looking more closely at the Fed’s latest economic projections and confidence charts. Finally, it will mean analyzing in real time what comes out of Powell’s mouth during the press conference following the FOMC meeting.

While this kind of audience participation is common in every Fed rate decision, interest in what the central bank has to say this time around could be heightened by growing speculation that the Fed will change course.

Context

To combat the recession, the Fed has raised interest rates by 475 basis points in nine hikes since March 2022.

Inflation, as measured by the Fed’s preferred price index, the Personal Consumption Expenditure, or Index, was 6.6% in the 12 months to March 2022, down from a four-year high of just 4.2% in March this year. increased to that extent.

Despite the slowdown, annual inflation continues to run at more than double the Fed’s 2% target. Therefore, the central bank has adopted a rate hike as the only proven way to deal with rising prices.

However, Fed officials and markets are at odds over future interest rates; While the central bank expects interest rates to remain at current levels until 2023, investors expect a cut before the end of the year.

Given the signs of stress re-emerging in the US banking industry in recent days, including the crisis at First Republic Bank, some think Fed officials may signal a pause in June.

Some Fed policymakers noted that tighter credit conditions could be used as an additional rate hike, possibly reducing the number of increases needed to bring inflation back to its target.

Data released recently in the United States reinforced investors’ concerns about a slowdown in the economy.

The U.S. Commerce Department reported Thursday that real estate grew at an annual rate of 1.1% in the first quarter of 2023, versus 2.6% in the fourth quarter of 2022. Economists tracked by Investing.com had expected GDP growth of 2% for the first quarter.

What Does This Mean For Products?

For my own readers, what will be the Fed’s actions and how will they affect gold, oil and other important commodities.

My partner on product strategy, Sunil Kumar Dixit of SKCharting.com, joins me for this task. But before analyzing the impact of the Fed’s recession on commodities, we first need to understand the potential impact on the dollar and Treasuries. Because they will be the catalyst for movement in all markets, including commodities such as crude oil and gold.

Gold Spot Daily Chart

Daily Crude Oil Chart

Oil

Like gold, it is determined by a variety of supply demand factors, from gasoline, diesel and jet fuel consumption to crude oil reserves stored in the United States and around the world. Also in the equation is how much oil China, the biggest oil importer, is buying and whether it has faithfully implemented the production cuts that OPEC+ has promised, or whether it is taking advantage of higher prices. For the purpose of this analysis, we will only focus on technical issues.

As of Monday, the hemorrhaging that began at $83.50 in WTI has not been fully stopped even after filling the $75.70 gap on April 3 caused by the latest OPEC+ production maneuver. At the time of this writing, US crude was up 0.5% at $76.03.

The downside is protected by resistance, which is a heavy combination of the 50-Day EMA and the 100-Day SMA, both at $77.00.

Weekly statics at 58/64 and RSI at 46 below neutral 50 support the continuation of the correction to $73.80 and then $71.80. Despite the demand for support, even a repeat of the 200-week SMA at $67 cannot be ruled out.

A consolidation above the 5-Day EMA of $75.95 could lead to a short-term move towards $77.

If WTI finds enough triggers for a move higher, a sustained break above $77 will see further recovery towards the daily Mid Bollinger Band at $79.

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Definition: The content of this article is for educational and informational purposes only and does not in any way constitute an inducement or recommendation to buy or sell products or any related securities. Author Barani Krishnan has no position in the products and securities he writes about. He often uses a different point of view than his own to bring variety to the market analysis. Sometimes they give opinions that contradict the parameters of the market in equity.