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Gold price zeros on Fed's Powell comments as markets watch for hints of tapering

Kitco News

(Kitco News) The gold market is focusing on the Federal Reserve this week with all eyes on chair Jerome Powell's press conference Wednesday afternoon as markets watch for any hints of future tapering.

While no major changes are expected out of the Fed's monetary policy statement itself, investors will want to make sure Powell remains as dovish as before during his press conference on Wednesday despite the improving macroeconomic data the U.S. has seen lately. This is why extra attention will be paid to any hints of potential tapering.

"Markets are starting to look for signs of tapering and Powell will surely be asked about the timing," said BBH Global Currency Strategy global head Win Thin. "The latest Bloomberg survey shows growing expectations of Fed tapering in Q4. About 45% of the economists responding expect the Fed to announce tapering in Q4, with 14% seeing an even earlier start in Q3."

ABN Amro said it might be a bit too early to start the tapering talk while not ruling it out that some kind of guidance will be announced by the third quarter of this year and for actual tapering of asset purchases to begin at the start of next year.

"On this, the Fed has promised to be more transparent and to telegraph such changes well in advance. Given this, we expect Chair Powell to continue to defend the dovish stance of the Fed in Wednesday's press conference," said ABN Amro senior economist Bill Diviney. "We and markets expect no change to policy or to the forward guidance on asset purchases and rates. The most likely change will be an upgrade to the assessment of the recovery, which since the last meeting has gained further momentum."

If no hints are given about the tightening timeline, markets are assuming that something will be said by August or September, according to Bannockburn Global Forex managing director Marc Chandler.

"Progress toward the Fed's targets is being made. Although we suspect it will be significant by the June meeting, the focus is for a signal about tapering is expected at either the Jackson Hole confab in late August or the September FOMC meeting," Chandler said.

During every press conference held this year, Powell has been asked about the looming inflation risk. To this, he's had an unwavering response — any price pressures seen this year "will be transitory." But as food, housing and building costs, as well as commodity prices, surge, Powell is bound to face a new wave of questions about inflation on Wednesday.

"In response, Powell is likely to reiterate that the risk of such a scenario is low in the near-term, given that this did not occur even with very tight labor market conditions at the end of the last cycle," Diviney noted.

The April meeting will not include any new macro forecasts or so-called dot plots, which show future rate expectations. However, there might be recognition that the U.S. economy and job growth are doing much better, added Chandler.

What does it mean for the gold price?

In the meantime, the gold market is in standby mode, waiting for the Fed's comments before committing to its next leg higher, according to analysts.

"The gold price is virtually unchanged at $1,780 per troy ounce ahead of the two-day monetary policy meeting of the Federal Open Market Committee that begins today," said Commerzbank analyst Carsten Fritsch. "It could be interesting to hear what Powell has to say about the further development of inflation and about when bond purchases – which currently amount to $120 billion per month – might be scaled back."

If the Bloomberg survey, which expects tapering to begin in Q4, is correct, "it is understandable that market participants are holding back before committing themselves to new investments" because it is earlier than expected in a survey a month ago, explained Fritsch.

The key $1,800 level remains a heavy resistance area for the precious metal. "One role in this is also likely to be played by the fact that the $1,800 mark has proven to be an obstacle that is difficult to overcome, for the time being at least. ETF investors are also exercising restraint at present, which can be seen as positive by comparison with previous months: the massive selling seen in February and March have now ground to a halt," Fritsch added.

An overshoot in inflation could encourage a move higher in gold in the short term, said MKS PAMP Group. "Fed chair Powell is expected to signal no rush to tighten, despite a slew of recent favorable data. This should see an overshoot on inflation, which should keep the yellow metal supported for the interim," MKS wrote on Tuesday.

Gold is looking much better from the technical perspective and could be ready to move higher, noted strategists at TD Securities.

"The value of gold above-ground to global money supply suggests the yellow metal is still cheap on this axis. In this context, the recent build-up in CTA short positioning continues to suggest that the elastic band is being stretched, as a substantial amount of shorts will be forced to cover if prices should break out higher," the strategists said.

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