Gold Price Forecast: Test of Key Support on Hawkish Fed Stance

March 18, 2018 — 6:00 AM EDT

Gold is likely to move lower during the coming week due to a firm dollar, although underlying trade stresses and vulnerability in risk appetite are likely to limit losses. Gold registered slight losses over the past week as the euro and commodity currencies lost ground, although selling was curbed by underlying vulnerability in risk appetite and concerns surrounding the risks of global trade wars. Overall, spot prices edged below $1,315 per ounce to near $1,310 on Friday as the euro lost ground.

The set-piece highlight of the week will be Wednesday's Federal Reserve policy decision. There are very strong expectations that the Federal Reserve Open Market Committee (FOMC) will raise the Federal Funds rate by a further 0.25% to a range of 1.50% to 1.75%. There will be a major market jolt if the FOMC decides not to raise rates or decides on an immediate 0.50% increase in rates.

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The policy statement will be dissected in detail, with the main focus likely to be on inflation rhetoric and whether there is significantly greater confidence that inflation will increase this year. The remarks on fiscal policy and growth conditions will also be a key influence. The FOMC will publish its latest economic forecasts, with most attention likely to be on the individual Fed Funds rate projections by FOMC members. A shift to expecting four rate increases this year would be an important shift that would tend to support the U.S. currency.

Fed Chair Powell will hold a press conference after the announcement, and his rhetoric will also be a key element for interest rate expectations. In broad terms, hawkish rhetoric and expectations of faster Fed tightening would be likely to strengthen the dollar and weaken short-term gold demand. In contrast, a more restrained stance would put upward pressure on gold through a weaker U.S. currency. The more likely outcome is a relatively hawkish tone, with the dollar making at least short-term gains but with gains limited by the fact that a hawkish stance has been priced in.

The performance of equity markets will also be important, especially given the fragile tone in risk appetite. A hawkish tone would be likely to undermine equities and trigger an element of defensive gold demand, especially if credit spreads widen. The U.S. data releases are unlikely to have a major impact, with the durable goods release on Friday a significant indicator of underlying capital spending.

Global trade tensions will remain an important focus during the week, especially given the impact on risk appetite. In this context, the G20 meeting on March 19 through March 20 will be monitored closely, with some relief for risk conditions if there is an attempt by the U.S. administration to ease trade tensions. Gold will, however, gain fresh support if there is an acrimonious meeting and aggressive U.S. stance.

President Trump is set to announce a raft of tariffs on Chinese imports in an attempt to cut the U.S. trade deficit. Any evidence of retaliation by China or an aggressive stance from the EU would tend to damage risk appetite and underpin gold.

Wider developments in the U.S. administration will also be an important focus, with speculation that there will be further changes following the dismissal of Secretary of State Tillerson and the resignation of Economic Council Director Cohn. There have also been reports that National Security Adviser McMaster will be replaced. A further shake-up in personnel would reinforce speculation over a more hawkish and protectionist trade stance and tend to provide an element of gold support.