On June 17th the US central bank, the Federal Reserve, will announce its latest decision on interest rates. Earlier this year, some in the market had expected the Fed to hike in June, however, market expectations have shifted back, and the first rate hike is now expected in December.
Although the Fed may not make any changes at this meeting, the market will be extremely interested in what Fed chairwoman Janet Yellen has to say. Below are three things we are watching out for:
- The Fed may hint at the potential timing for the first rate hike. If they sound dovish then the market could push back expectations to the first quarter of 2016, if they sound hawkish then a September rate rise could come back into focus.
- Is the Fed still willing to hike rates even though Q1 GDP fell into negative territory and inflation pressure remains weak?
- Does the Fed think that the market is being too cautious in only expecting 100 basis points of increases, approx. four interest rate hikes, over the next 18 months?
This information could have a major impact on the financial markets. For 6 years interest rates in US have been at 0%, one rate hike, even if it is small, could weaken risk sentiment as the market tries to adjust to a new normal where interest rates are expected to be higher in the future.
The Fed and risk sentiment:
Traditionally, when interest rates rise this causes the dollar to rise, Treasury yields to rise, and stocks to sell off, so if the Fed hints at a timetable for interest rate increases at this meeting then expect market volatility to rise. Below we take a look at the potential impact on gold and oil.
Gold: the yellow metal has had a tough 2015 so far, and is fast approaching the base of its recent range at $1,170. If the Federal Reserve reveals its rate-hiking strategy at this meeting then we may see gold break below key support at $1,150, then $1,132 – the low from July 2014. Typically when interest rates rise in the US this pushes up the dollar, since gold is priced in dollars this can weigh on the price of the precious metal. Thus, the second half of 2015 may be a struggle for gold bulls.
Oil: commodities tend to fall when the dollar rises, so if the Fed sounds hawkish at its June meeting this could hurt the oil price. After last year’s dramatic fall in the oil price, it has been trading in a fairly tight range in recent months. Brent crude has traded between $50 and $60 per barrel since April. If the Fed hints that a September rate hike is on the cards, then we could see oil gains capped for the next few months, with $60 a significant level of resistance. On the downside, the low of the last 12 months at $45.19 for Brent, may act as solid support.
Although the Fed is not expected to actually hike rates at this meeting, the market will be analysing every word spoken by Fed chairwoman Janet Yellen in case she hints at a timetable for raising rates. We expect this meeting to generate market volatility, and due to the commodity market’s sensitivity to changes in value of the US dollar, expect a strong dollar to weigh heavily on the price of gold and oil in the coming weeks.
By: City Index analysts