The US Fed rate hike is expected to have a neutral-negative impact on Gold, and a positive to marginally positive impact on Dollar, ahead of the Fed meeting.
Since the beginning of 2022, the dollar has consistently moved higher on the expectation that the Fed will remain hawkish for this year and that officials at the central bank will continue to raise concerns over inflation, according to Currency Insight report of Motilal Oswal Financial Services Limited (MOFSL). Technically, the dollar index is headed towards the 100.50 - 102 mark in the near future; however, on downside MOFSL expects the dollar index to find support near 96.50 and 95 levels.
On the other hand, gold has erased off the war premium and is in a corrective mode. However, any surprise in the Fed meet could further weigh on the bullion prices. While resistance is seen at $1990 when it comes to Comex gold, it also has a support at $1870- $1880 mark. On the domestic front, Gold could see a strong support at 50,000; whereas 53,100 could be a resistance level.
Super rally in commodities
While global commodity prices have witnessed one of the best rallies in more than 50 years, events in Russia and Ukraine are unleashing exceptional commodity price moves, which could have structural implications on long-term supply.
Base metals have surged sharply in the last few sessions with nickel has been an outperformer with over ~100% YTD gains. The underlying tone has been bullish, with massive demand coming from Steel Mfg. and EV battery makers.
Nickel recently hit an 11-year high as stockpiles have dwindled at the London Metal Exchange due to strong demand from automakers. An intensification of sanctions on Moscow could push prices higher.
Copper hit a record high above $10,500 a tonne last year and has doubled since the depths of pandemic. Cobalt has climbed more than 40% over the past six months. Not everyone is convinced that metals are set for a new super cycle. The growth of renewable energy and electrical vehicles will boost demand for metals but that could be offset by a contraction in demand from China.
Oil prices have surged from levels by approximately 30-40 percent in the last one month post Russia’s invasion of Ukraine and supply constrains build up sharp risk premium in prices. In the middle of rally, there were reports suggesting that there could be a global agreement to release crude reserves but failed talks further led to upside move. Prices got further boost after the US President Biden announced a ban on Russian oil and other energy imports in retaliation for the invasion of Ukraine. This means Russian oil will no longer be acceptable in U.S. ports.
Inflation a major concern
Pandemic inflation anomalies are settling down. Durable goods inflation decelerated sharply last month. US consumer price growth approached 8% last month ahead of a surge in energy prices following Russia’s invasion of Ukraine, raising pressure on the Federal Reserve to more substantively tighten monetary policy.
The latest report captures the period just before Russia launched a full-scale attack on Ukraine and western allies unveiled among the most punitive financial penalties ever levied on a country, including a US ban on Russian energy imports.
The Fed is set to proceed with a quarter-point interest rate this month, and will then seek to move the federal funds rate closer to a level that neither aids nor constrains economic activity. Investors are also factoring in a hit from higher commodity costs as consumers and businesses face higher energy bills. Given how the central bank is reluctant to push the country into recession, the Fed is walking a tightrope.
In December, the Fed published the individual economic projections of its top officials. A majority thought core inflation would settle at 2.7 percent in 2022 before dropping to 2.3 percent the year after, however it currently hovers at 5.2 percent. This meeting could yield yet another update to the ‘dot plot’ of individual interest rate projections, with five increases potentially pencilled in for this year and four more next year. In the recent past, most Fed officials have acknowledged that a faster pace of rate rises was ‘likely warranted’ compared to the last tightening cycle, when the Fed increased its main policy rate by a quarter-point in December 2015 and then held off on another adjustment until the end of 2016.
The Fed Chairman, in his testimony, confirmed his support for a quarter-point rate rise at the central bank’s March meeting as he laid out the case for tightening monetary policy amid heightened geopolitical tensions. Alongside plans to raise rates, the Fed will also begin scaling back its $9tn balance sheet. However, investors will now be looking at how rally in base metals and energy price could be impacting the overall inflation.
