Gold pressured by new Fed chair ahead of inflation

The odds of a Fed rate hike are rising and doves are running out of excuses as the new Fed Chair presents a shift in policy direction ahead of the release of key US inflation data.

Key Points Moving the Market

• Markets raise the odds of a rate hike this year despite the new Fed Chair's dovish credentials.
• Analysts note that the data undermine dovish arguments as the job market recovers amid high inflation.
• The Fed's preferred inflation metric, core PCE, is expected to accelerate to 3.3% in April from 3.2% a month earlier.

Market Warns Warsh Not To Be Dovish

Analysts who hoped for a ground-shaking announcement at the new Fed Chair Kevin Warsh's swearing-in ceremony last Friday were a bit disappointed. The event was unusual in that it was held at the White House, with traders trying to see whether that meant US President Donald Trump would have more influence over monetary policy. However, Trump made a point of saying that he wanted Warsh to act independently and not mention interest rates or the economic outlook. However, analysts noted that his comments implied that, under his leadership, there would be important shifts in the way the Fed communicated, which could affect how the market reacts to policy meetings. After all, the Chair is just one vote out of twelve, so he doesn't determine interest rate policy. However, he can steer the policy debate and is a crucial actor in shaping market expectations through his post-rate-decision press conferences.

Despite Warsh being generally viewed as dovish, in line with Trump's push to lower rates, futures markets raised the odds of a Fed rate hike by the end of the year to around 70%. That's based on persistently high inflation and an economic rebound that appears to be supporting a growing labour market. All of these factors undermine the arguments that doves use to justify lowering interest rates. Such a move might help Warsh reduce divisionism at the Fed, which saw a rising number of dissenters in the final months of Powell's term, breaking with the tradition of unanimous rate decisions. However, the move creates a delicate balance between an increasingly hawkish Fed, based on the data, and Trump's expectation of lower rates. Warsh said he intended to move away from backwards-looking economic dogmas to achieve stronger growth. Many interpreted that as a shift away from data and a preference for lower rates that support growth over inflation concerns. Another potential change is to reduce the importance of the PCE price index for future Fed decisions and focus more on core CPI. The preferred inflation metric for the Fed, core PCE, is expected to accelerate to 3.3% in April from 3.2% in March. The second reading of Q1 GDP growth is expected to confirm 2.0% annualised growth, up from 0.5% in the final quarter of last year.

Lower Yields Over Lower Rates

Warsh also affirmed his views on the balance sheet, an opinion he shares with Treasury Secretary Scott Bessent, that it should be the government, not the Fed, that manages debt levels. He argued that the Fed's monetary base expansion has fuelled rising inflation and is keen to resume shrinking the Fed's balance sheet, which had been paused amid market liquidity concerns. In practice, such a move would raise yields without increasing the official rate, thereby lowering inflationary pressure and placating Trump at the same time. The impact on the markets, however, would be similar to a rate increase, supporting the dollar and weighing on gold. According to Bessent, Trump wants lower long-term yields, which could be achieved by raising short-term rates to reduce inflation. Markets will be looking closely at his future comments for confirmation of this theory.

Gold Consolidation Tightening

The price of gold has retraced to retest the lower auto trendline, which seems to be holding the bears off the lower VWAP at $4425 per ounce for now. However, with the indicator tilting downwards and the upper trendline aligning with the middle VWAP line at $4600, even a short-term bounce could be followed by further declines. Given that RSI is near the 40 level and the gold consolidation is tightening, if the yellow metal falls towards 30 RSI, it could lose $100 an ounce, initially exposing $4400 and then $4250. On the other hand, if the trendline or a double bottom at $4450 holds, the break of $4600 could open the door to the upper VWAP at $4775.

Source: SpreadEx, Daily Chart