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Waiting on the Fed; how aggressive will tomorrow’s rate hike be?

Commentaries & Views

Today the Federal Reserve began the June FOMC meeting which will conclude tomorrow. Up until last week’s CPI report, it was widely anticipated that the Federal Reserve would raise its Fed funds rate by ½%. However, the fact that inflationary pressures have risen to 8.6% in May has dramatically changed that assumption.

Quite a few analysts and economists are now predicting a 75-basis point interest rate hike. Last week the CME’s FedWatch tool was predicting that the probability of a 75-basis point rate hike was only 3.9%. Yesterday the probability grew to 34.6%. Today the probability of a ¾% rate hike according to the FedWatch tool has swelled to 90.7%, and the probability of a ½% rate hike has diminished to only 9.3%.

Gold analysts such as myself are now in the minority believing that the Federal Reserve will continue to raise rates by ½ % (50 basis points) tomorrow and at the remaining FOMC meetings to address inflation. Including the June meeting, there are five remaining FOMC meetings this year (June, July, September, November, and December). If the Federal Reserve raises rates at all of the remaining FOMC meetings by ½% (50-basis points) it would add 2 ½% to the current Fed funds interest rate of 75 - 100 basis points up to 325 - 350 basis points by the end of the year.

The high probability of a much more hawkish monetary policy by the Federal Reserve has pressured gold dramatically lower this week. Over the last two days, gold dropped roughly $70 per ounce after opening on Monday at $1880. As of 5:05 PM EDT gold futures basis, the most active August 2022 contract is currently trading at $1809.80 a decline of $22 (-1.20%) today and approximately $50 (-2.49%) yesterday. If the Federal Reserve enacts a 75-basis point rate hike tomorrow we could easily see gold prices drop below the key psychological level of $1800 per ounce. If the Federal Reserve continues to raise rates by 50-basis points we could see gold prices bounce higher because market participants have largely factored a more aggressive rate hike into current gold pricing.

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Wishing you as always good trading,

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