Fed Rate Hike Does Little to Change Investors’ Focus on Inflation and Ukraine

The rate hike of ¼% was not only anticipated by market participants but was also factored into current pricing. The dramatic change in the Fed’s forward guidance announcing that they intended to raise rates at each of the FOMC six meetings this year was not expected. Even more interesting was how investors reacted to the aggressive Fed policy.

U.S. equities and gold staged respectable rallies both yesterday and today, which is not what you might expect from investors after hearing that the Federal Reserve plans to raise rates by 2% this year, or is it? After the release of the FOMC statement and Powell’s press conference yesterday, both risk-on and safe-haven assets classes moved substantially higher. This fact defines market sentiment as it pertains to what traders and investors are focusing upon.

Three forces resulted in rallies in both the precious metals and U.S. stocks. First is what the Federal Reserve says it plans on doing and whether or not they can act as aggressively as stated in their revised guidance, coupled with the fact that the next FOMC meeting will not take place till May 3. Secondly, market participants are focused upon inflation which, according to the CPI data from February, is at 7.9%, a 40 year high. Lastly, investors continue to focus on Russia’s invasion of Ukraine.

Gold gained approximately 2.47 % from yesterday’s low of $1895 compared to its current value of $1943. The NASDAQ composite gained 2.93%, the S&P 500 gained 2.78%, and the Dow Jones Industrial Average gained 2.42% in the last two days. This is a clear indication that the majority of traders and investors are focusing on the economic climate that exists now rather than what might occur at the end of this year or next.

On a technical basis, yesterday’s low of $1895 in gold futures was a 61.8% retracement from the highs which occurred last week. This is a deep but acceptable level for a correction to conclude at.

That is why in yesterday’s article, we stated that the daily low in gold was probably the conclusion of the recent selloff that could easily result in a pivot or key reversal, taking gold prices substantially higher. While we are anticipating a dramatically higher rising in gold over this year, the question is, will gold encounter resistance?

Recent historical tops could provide meaningful insight to answer that question. In November 2020 and January 2021, gold found resistance at $1960, forming a double top. With gold futures now just $17 shy of that mark, it seems a logical place should gold continues to rise where resistance could occur.

It seems highly unlikely that the first leg of this rally will challenge the all-time high of $2088 or last week’s high of $2078. That being said, we must acknowledge that this market is news or headline-driven and, based upon events that will occur over the rest of this month, could change that outlook or perspective.

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Wishing you as always good trading,

Gary S. Wagner