Gold holds firm after edging up on Tuesday ahead of two-day Fed meeting starting today. Fed is expected to be more dovish than before while interest rates will likely be kept on hold due to soft inflation. However, it is said that Fed will only be able to keep its patient approach as long as inflation keeps increasing despite the weakness since otherwise, in a case of decreasing inflation, easing monetary policy would not be the right decision to make. In the meanwhile, German Chancellor Angela Merkel said on Monday that she hopes inflation in the Eurozone will reach the target level which is determined by European Central Bank (ECB) and thus they will be able to start increasing interest rates. On geopolitical side, while uncertainty around Brexit still remains, House of Commons Speaker John Bercow stated that government cannot bring same Brexit deal, which was rejected two times already, to the parliament for a third vote without making significant changes.
It is claimed that Fed will likely be more dovish than expected after 2-day Federal Open Market Committee meeting starting today while there will likely be no change in interest rates due to soft inflation. Thus, gold prices hold firm as dollar weakens.
As of 14:39 GMT+3, spot gold was trading at $1,308.06 while dollar index was at 96.37. U.S. 10-year Treasury yield edged up to 2.605.
According to Bloomberg, what Fed policymakers will do in case of weakening inflation is uncertain while they already stated they would let inflation to surpass 2% target. It is iterated that weak inflation below 2% as well as rising global economic growth concerns and geopolitical risks allow Fed to have patient approach, however if inflation weakens more, then central bank will be in tough situation. Some economists think lowering interest rates will cause panic while others say this is not really a long shot to lower interest rates because that is what you do when an economy slows down. According to Bloomberg’s survey, Fed is expected to lower its interest rate projections to one in 2019 and this increase will likely happen in September.
In the meanwhile, German Chancellor Angela Merkel said she believes and hopes that inflation in the Eurozone will reach 2% target determined by ECB soon, so ECB will be able to start increasing interest rates. According to Eurostat, Eurozone inflation inched up in February to 1.5% from 1.4% in previous month however core inflation, which is carefully watched by ECB, edged down in February to 1%, from 1.1% in January.
On geopolitic side, there was a surprise in the UK’s Brexit conflict. House of Commons Speaker John Bercow stated that government cannot bring the Brexit deal to parliament for a third vote without making significant changes. Bercow said it would be disrespectful to the British parliament to bring the same deal, which was already rejected two times, referring to a parliamentary rule dating from 1604 which states that a defeated motion could not be brought back in the same form. Thus, Prime Minister Theresa May’s hopes for a third vote before going to Brussels for requesting an extension to Article 50 shattered. May was planning to request an extension of 3 months for departure in case of her Brexit deal passing through parliament, however this extension will likely be longer than previously thought now.