Powell Testimony to Shed Light on Latest FOMC

After conflicting interpretations of the results of the last FOMC meeting, Fed Chair Jerome Powell's testimony in front of Congress might provide some clarity.

Setting the Record Straight

Later today, Fed Chair Powell will testify before the House Financial Services Committee, the start of the bi-annual report that the head of the Federal Reserve does before Congress. Typically the presentation before the House is the one most watched by markets since the presentation before the Senate a day later generally follows the same beats.

Last Wednesday, the Fed didn't raise the reference rate for the first time since the start of last year, in what was speculated to be a "skip". The decision was also accompanied by an outlook suggesting two more hikes in the offing. But in the press conference later, Powell insisted it wasn't a "skip", didn't talk about a "pause", and left the markets with a more dovish feeling. He's expected to reiterate the same tone before Congress as in the post-rate decision presser. With the "hawkish pause" being interpreted by the market, it might be an opportunity for Powell to clarify how likely a rate hike is at the next meeting.

History of Fed Chair Movers

The last time Powell was before Congress was in March, when he doubled down on a hawkish tone, sending yields higher. Subsequently, several regional banks collapsed as unrealised losses from high yields threatened their balance sheets. Congressional testimonies by Powell have a history of shaking up markets, including provoking a sell-off in gold in March as the dollar rose following his remarks.

The expected dovish tone might have the opposite effect this time, as gold is seen in a holding pattern through the US holiday and ahead of Powell's presentation. The question will likely be asked around the "skip" issue since that implies another rate hike in July. Powell initially used the word about what happened at the last meeting but then retracted, saying he shouldn't call it a "skip", emphasising that the Fed wanted to move more slowly. At the moment, three-quarters of traders expect a rate hike at the next meeting; if Powell can sound convincing that a "pause" is happening, that number could drop and benefit gold.

Gold's Decline Near If Not Over?

Despite a triangle pattern ending at $1987/oz, the proximity of the current price to the bottom of 1936/oz opens up speculation of a falling wedge pattern. If the lower trendline holds firm following a breakdown, gold might see a full-blown reversal towards $2085/oz or a correction to around the $2k handle, where more evidence may appear. Losing the trendline will expose $1900/oz and $1865/oz unless the descent continues towards the bottom of $1812/oz, validating the corrective nature and confirming the predominance of the bearish trend.

Source: SpreadX / GOLD

Key Takeaways

The upcoming testimony of Fed Chair Jerome Powell before the House Financial Services Committee may clarify the recent decision not to raise rates for the first time in a year. Powell is expected to reiterate his dovish tone from the post-rate decision press conference and clarify the likelihood of a rate hike at the next meeting. However, his Congressional testimonies have a history of shaking up markets, with the expected dovish tone potentially seeing the opposite effect this time. So, if Powell can convincingly suggest a "pause" going on, it could benefit gold by reducing the number of traders who expect a rate hike at the next meeting.