Investors Focus on the Next FOMC Meeting, 10-year Treasuries and Dollar Strength

This month’s FOMC meeting is scheduled to begin one week from today, on January 25, and conclude on the following day.

U.S. equities vis-à-vis the Dow Jones industrial average had its strongest decline this year. The Dow lost 542.42 points, a decline of 1.51%, and is currently fixed at 35,369.39 points. Yields on the U.S. 10-year Treasury Note gained 10.5 basis points taking the current yield to 1.877%, the highest level since January 2020. The 30-year Treasury bond gained 7.7 basis points taking the yield to 2.192%. The short-term two-year Treasury Note yield broke above 1%, the first occurrence of short-term treasury yields at this level in two years. Lastly, the U.S. dollar rose sharply in trading today, gaining 0.66% or 0.629 points taking the dollar index to 95.78.

U.S. equities, Treasury yields, and the dollar all reacted to the assumption that market participants are anticipating that the Federal Reserve will begin an aggressive series of rate hikes tightening their current accommodative monetary policy to curtail the spiraling level of inflation, which is currently fixed at 7% based upon government data released last week vis-à-vis the CPI (consumer price index).

On Tuesday, January 11, Chairman Jerome Powell speaking before the Senate banking, housing and urban affairs committee in regards to his re-nomination, said, “As we move through this year … if things develop as expected, we’ll be normalizing policy, meaning we’re going to end our asset purchases in March, meaning we’ll be raising rates over the course of the year. At some point perhaps later this year, we will start to allow the balance sheet to run off, and that’s just the road to normalizing policy.”

The Fed Chairman acknowledged that the Federal Reserve had greatly underestimated the speed at which inflationary pressures have risen and indicated that the monetary policy of the Federal Reserve needed to pivot in regards to their dual mandate, which had been focusing on maximum employment in lieu of their acceptable inflationary target of 2%.

The chairman said that it is appropriate to focus upon inflationary pressures at this point. As such, the expectations of rate hikes this year have dramatically changed, with market participants now factoring in three or four interest rate hikes this year.

Although multiple asset classes had strong reactions to the possible actions of the Federal Reserve next week, it was dollar strength that most affected gold prices today. As of 4:25 PM EST, gold futures basis, the most active February 2022 Comex contract, had a modest to fractional decline resulting in a loss of $3.10 or 0.17% and is currently fixed at $1813.30.

However, the three other precious metals which trade on the futures exchange all had moderate to strong price gains. Silver led the way with the most active March contract gaining 2.63%, fixing current pricing to $23.52. Platinum gained 1.58%, a net gain of $15.20 with the most active March 2022 futures contract fixed at $979.80, and lastly, palladium gained 1.11%, taking the most active March contract to $1899.

Gold pricing actually had fractional gains before factoring in dollar strength. This can be clearly illustrated by the KGX (Kitco gold index). As of 4:28 PM, EST spot gold is currently fixed at $1813.60, based upon normal trading adding $4.00 worth of value and dollar strength taking away $9.60.

Our technical studies indicate that the low achieved today in February gold futures which occurred at $1804.70, is just above a key and critical support level, which is based upon the 61.8% Fibonacci retracement level fixed at $1804.60. Our studies also indicate that current resistance is at $1833.30, ,mkbased on a 38.2% Fibonacci retracement level. The data set used for our retracements begins at $1758, the low of November 3, and concludes at $1879.50, the highs achieved on November 16.

Wishing you as always good trading and good health,

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Gary S. Wagner