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Market Brief: The Fed and the Dollar

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The following is a market update as it related to precious metals prepared by SchiffGold intern commodities analyst Jason Mezhibovsky.

Last week, the Federal Reserve released the minutes from its Federal Open Market Committee meeting earlier this month. There weren’t any big surprises. The FOMC indicated that it would continue to take a “patient” approach to its monetary policy, basically stating that it is in no rush to adjust the policy either way for now.

Fed officials seemed to agree that this “do-nothing with interest rates” approach could continue for “some time.”

Members observed that a patient approach to determining future adjustments to the target range for the federal funds rate would likely remain appropriate for some time.”

Gold remained relatively unaffected in terms of price action before and after this release of the minutes. The yellow metal seems to be reacting most strongly to the various ebbs and flows of the trade war.

There was some safe-haven gold buying late last week as trade war fears ratcheted up. There were also some bad economic numbers that weighed on stocks and buoyed gold.  Initial jobless claims fell by 211,000 but the forecast was them to fall by 215,000. The US manufacturing PMI came in at 50.6 in May. That’s the lowest level since September 2009. New home sales numbers were also softer than expected. 

However, the Fed minutes prompted the dollar index to reach a yearly high last week. This was caused by investors speculating on what some analysts see as a decreasing likelihood of a rate cut. But the greenback eased off of those hights on Friday. This was seen as a reaction to Federal Reserve Chair Jerome Powel’s statements regarding the implications of the tariffs from the US-China trade war, and how it might be too early to take them into consideration. This stirred up some renewed optimism for a rate cut if the trade war drags on.

USD Up Compared to Euro and Pound

Political uncertainty in the Brexit vote has lowered both the euro and pound in comparison to the dollar, which was viewed as a safer bet compared to the two aforementioned currencies. This arose from the turmoil surrounding the European Parliamentary elections,  Theresa May’s resignation and the ongoing Brexit saga. There is a lot of uncertainty surrounding the possible results of these moves, which has caused the currencies to weaken and the dollar to strengthen.

However, this strengthened dollar might see some downfall if the Fed eventually cuts rates. This could prompt a boost in the gold price due to its inverse relationship.

Peter Schiff has been saying that the Fed will have to turn to rate cuts and QE sooner rather than later because the Powell Pause will not ultimately be enough to support the markets.

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