The Federal Reserve is due to release the statement from their March meeting. Additionally, general elections are being held today in the Netherlands. What can we expect from these two events and how can they affect the gold market?
All indicators suggest that the Fed is likely to hike interest rate today. The inflation rate has picked up recently, while the latest data on employment has beaten expectations. The Fed officials have been talking about a rate increase like crazy and the market odds of an upward move are about 90 percent.
Even Mario Draghi, the ECB President, was very kind and adopted a more hawkish stance, weakening the U.S. dollar a bit and making more room for a hike. Therefore, the Fed has no choice but to hike.
What is more interesting is whether the Fed will provide another hawkish signal about future tightening. Right now, investors expect the second hike in June and the third one in December. If these expectations shift, the price of gold may react. There should be no big changes from the latest Economic Projections, but the Fed is likely to sound a bit more hawkish than in December.
How might the FOMC statement affect gold prices? Well, there may be a “sell the rumor, buy the fact” scenario, which we have seen during previous increases (however, investors should remember that a December Fed hike initially pushed gold down).
Such reaction may be strengthened by the possible victory of Geert Wilders in the Dutch elections. The latest polls show that he is neck and neck with the current Dutch Prime Minister (although his Party for Freedom seemed to lose some support due to the aggressive stance of the Dutch government in the recent diplomatic dispute between the Netherlands and Turkey). However, as we learned last year, polls underestimate the chances of the populists winning.
Wilders’ triumph would not surprise us, but it may not be enough to form a ruling coalition. On the other hand, his loss would decrease the political uncertainty in Europe, which could trigger some outflows from gold, the traditional safe haven. One thing is certain: this week may be really hot for the gold market.