Federal Reserve Set To Boost Interest Rates as Dollar Strengthens and Stock Market Soars
The Dollar* Index had a volatile week last week, falling below 100 after the Italian Constitutional Reform Referendum was overwhelmingly rejected by voters last Sunday night. The Dollar Index dip was short-lived, however and it quickly retraced its losses. Gold and silver rallied on word of that the Italian reforms had been rejected. They also soon retraced their gains.
On Thursday the European Central Bank (ECB) announced that it would taper and extend its current quantitative easing program. The ECB announced that its bond buying program would be reduced to $60 billion a month but extended to December 2017. The ECB added the caveat that the program could changed based on economic circumstances.
The Euro fell from $1.08 to $1.06 on the announcement and ended the week at $1.05. The Dollar Index dollar which had fallen just below 100 in post Italian Reform trading, rose to 101 on the ECB announcement.
The British Pound managed to hold gains over $1.25 as fears of a “hard Brexit” faded. The British Parliament voted overwhelmingly to endorse Brexit and for talks to begin March next year.
The University of Michigan index of consumer sentiment hit an 11 year high on Friday, further strengthening the dollar. The Dollar Index traded late Friday close to 102.
Despite the news that Italian Constitutional Reform was rejected and the ECB would be slashing their QE program, US stock markets hit record highs.
Next week market participants anticipate that the Federal Reserve will announce an interest rate hike at the end of it meeting on Wednesday, December 14. The Federal Reserve last raised interest rates in December 2015. In January 2016, the U.S. Stock markets sold off violently. Market rebounded when the Federal Reserve reduced expectations for further rate hikes in 2016.
Fed Guidance – The Trump Effect
Since a general consensus among market participants has emerged that the Fed will raise interest rates at its December meeting, markets should have priced in such a move. Market participants will pay close attention to the Fed’s guidance as to the timing and pace of further rate increases. The Fed will certainly be cognizant of the impact that further rate hikes may have on dollar strength and may temper their forward rate hike guidance.
While considering future rate hikes, the Fed will also pay close attention to Donald Trump’s as of yet nebulous plans to build U.S. infrastructure and the borrowing costs and inflation they may entail. New York Fed President, William Dudley noted last week that the election of Donald Trump has created “considerable” uncertainty.
Gold and Silver
Gold continued to fall this week and was trading in the $1159-$1175 range. Gold has been under pressure since the election of Donald Trump. The price of gold has fallen for four weeks in a row to nine month lows.
Gold was trading at $1160 an ounce Friday morning, down about $15 from last Friday morning.
Year to Date Dollar Index, Oil and Gold Prices
Silver rose last week after falling sharply the past two weeks. The price of silver has fallen from about $2 since the election of Donald Trump, or about 11%.
The price of silver late Friday morning was at $16.85 an ounce, up about thirty-five cents from last Friday morning.
Year to Date Dollar Index, Oil and Silver Prices
Oil rose sharply last week on the announcement of a OPEC oil production cut/freeze. Oil rose the first six months of 2016 and leveled off during the summer, trading on news of stockpiles and the possibility of output freeze talks. OPEC’s decision to cut output had pushed oil back to over $50 a barrel. Oil continues to trade on vacillating sentiment whether output cuts will be enough to offset the current oil glut.
Oil was trading at $51.45 a barrel Friday morning.
Markets participants will be on alert for any economic reports that are out of the ordinary that might derail the Fed’s December rate hike.
Here are some economic reports that may have an impact on the gold, silver and currency markets this week:
Dec 12 Treasury Budget Nov
Dec 13 Export Prices ex-ag. Nov
Dec 13 Import Prices ex-oil Nov
Dec 14 MBA Mortgage Index 12/10
Dec 14 Retail Sales Nov
Dec 14 Retail Sales ex-auto Nov
Dec 14 PPI Nov
Dec 14 Core PPI Nov
Dec 14 Industrial Production Nov
Dec 14 Capacity Utilization Nov
Dec 14 Business Inventories Oct
Dec 14 Crude Inventories 12/10
Dec 14 FOMC Rate Decision Dec
Dec 15 CPI Nov
Dec 15 Core CPI Nov
Dec 15 Initial Claims 12/10
Dec 15 Continuing Claims 12/03
Dec 15 Philadelphia Fed Dec
Dec 15 Empire Manufacturing Dec
Dec 15 Current Account Balance Q3
Dec 15 NAHB Housing Market Index Dec –
Dec 15 Natural Gas Inventories 12/10
Dec 15 Net Long-Term TIC Flows Oct
Dec 16 Housing Starts Nov
Dec 16 Building Permits Nov
* The US Dollar Index tracks the US dollar vs. the Euro, the Japanese Yen, the British Pound, the Canadian Dollar, the Swedish Krona and the Swiss Franc. The Euro comprises nearly 58% of the index.
This article by BGASC is not, and should not be regarded as, investment advice or as a recommendation regarding any particular course of action.