Janet Yellen testified yesterday before the Senate Banking Committee. Is there anything new in her remarks? What do they mean for the gold market?
Generally speaking, the Federal Reserve Chair echoed her comments offered at a press conference after the FOMC meeting. Yellen’s speech was perhaps even more dovish than last week, as she mentioned the possibility “expressed by some prominent economists that the slow productivity growth seen in recent years will continue into the future”. Moreover, Yellen repeated a few times that the current economic environment warrants only a cautious approach to raising interest rates. She said:
Proceeding cautiously in raising the federal funds rate will allow us to keep the monetary support to economic growth in place while we assess whether growth is returning to a moderate pace, whether the labor market will strengthen further, and whether inflation will continue to make progress toward our 2 percent objective.
It implies that a July hike is rather impossible. Indeed, the market odds of interest rates rising next month are less than 12 percent, according to the CME Group FedWatch. The reason for this impossibility is that the Fed will be unable to assess the health of the labor market in the time until the next meeting, unless the July payrolls turn out to be wonderful.
Last but not least, Yellen elaborated a bit on Brexit, saying that “a U.K. vote to exit the European Union could have significant economic repercussions”. She also added that Brexit could trigger uncertainty and volatility “that could affect market conditions and the U.S. economic outlook”. Indeed, although companies within the S&P 500 have little direct exposure to the United Kingdom, there may be a contagion effect, as Britain is one of the largest financial centers in the world heavily interconnected with the rest of the world. In the case of Brexit, we could also expect a rise in uncertainty and market volatility. Moreover, the United States is the largest single investor in Britain.
The bottom line is that Yellen gave a testimony before the Senate Banking Committee. Her speech did not present anything new, but sounded slightly more dovish than remarks offered last week, as the Fed Chair pointed out “considerably uncertainty about the economic outlook” and elaborated a bit on potential consequences of Brexit. However, her remarks did not significantly move markets. The price of gold declined yesterday, probably because of the risk appetite (and increased demand for stocks) among investors due to the decreasing odds of Brexit. It signals that gold may go south if Britons vote to remain within the EU.
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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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