Are Traders Getting Ahead of the Federal Reserve’s Decision

Gold continued its ascent, and now for the second day in a row has closed moderately higher on the day in anticipation of tomorrow’s Federal Reserve announcement regarding an interest rate cut. As market participants continue to speculate and attempt to factor in the Fed’s decision tomorrow, their actions continue to be very bullish for gold.

The question becomes based on recent gains in gold prices are market participants attempting to factor in the potential for ½ a percent rate cut. If so, they are certainly placing a bet against the odds. As of 4:15 PM EDT gold futures basis the most active August contract is currently fixed at $1431.50, which is an $11.10 gain today.

While the CME’s FedWatch tool predicts that there is 100% probability that there will be the announcement of a rate cut tomorrow by the Federal Reserve, it is only forecasting a 20.4% probability that this rate cut will be ½ a percent. It is however predicting that there is a 79.6% probability that the rate cut announced tomorrow will be ¼%.

Typically, prior to the conclusion of a FOMC meeting when it is highly anticipated that the Federal Reserve will adjust the current Fed funds interest rate, market participants choose caution and for the most part have a “wait and see” demeanor. However recent gains suggest market participants trading gold are reflecting a much more aggressive stance.

In an article penned by William Watts, the Deputy Markets Editor of MarketWatch, he said that, “Gold bulls might be in a mood to celebrate if the Federal Reserve, as is widely expected, delivers a rate cut Wednesday. But history suggests they might want to keep their emotions in check.”

He interviewed James Steel, the chief precious metals analyst at HSBC securities, who crunched data going back to 1987 looking at price changes in gold 180 days surrounding an easing cycle. His research found that “In the 180 days before and after the beginning of an easing cycle. He found that gold’s 11.4% rally in the past three months is the largest percentage rise in the run-up to an initial rate cut, with 2007 offering the only comparable increase as it put in a roughly 10% rally in the month before the Fed’s half-point cut in September of that year.”

Most importantly that rate cut was in response to the 2007 financial crisis. The housing and credit market crisis in the United States led to a global financial crisis. The actions by the Federal Reserve were in response to the imminent recession of 2008.

James Steel suggested that, “In contrast, the Fed’s expected move on Wednesday is widely described as an “insurance” cut, coming when underlying economic data remains relatively healthy, in an effort to ensure a “soft landing” and avert a recession.”

He concluded that the data suggested that market participants should yield to caution after cut because it is not uncommon for markets to give back such anticipatory gains citing the often-used phrase of “buy the rumor, sell the fact”.

While it is unclear as to how market participants will react to the Fed announcement tomorrow it is clear that market participants are attempting to get ahead of the curve in anticipation of a rate cut.

Wishing you as always, good trading,