Tax Cut, Fed Chair, and the Dollar

Traders, analysts, and market participants have been intensely focused on who will be at the helm of the Federal Reserve come February of next year, as well as on the potential for a tax cut.

It is these two upcoming factors that have had a tremendous effect on the U.S. dollar, and it has been the U.S. dollar that has had the most significant impact on dollar-priced commodities such as gold and silver.

Today the dollar scored its largest single-day gain in a month. The dollar index is currently trading at 93.58 which is a net gain of 0.49% on the day. This sizeable upward spike in the dollar today had the opposite and reciprocal effect on gold pricing.

After gaining almost $10 yesterday, as news hit the wire services that President Trump favored Jerome Powell as the next Fed chairman, gold prices gave back the entirety of that move to close under dramatic pressure to finish the week.

However, whereas yesterday’s upside spike in gold was based on buying along with a fractional effect from a weaker U.S. dollar, today’s decline in gold pricing was almost entirely dollar based.

As of 4 o’clock EDT, spot gold prices are fixed at $1280.90, a net decline of -$8.80 on the day. According to the Kitco Gold Index (KGX), today’s decline is almost entirely attributable to dollar strength. Of the -$8.80 decline, -$7.60 is the direct result of a strong U.S. dollar, with the remaining -$1.20 as a result of traders selling the precious yellow metal.

Today’s dollar strength was a reflection of the optimism prevalent by market participants in regards to a potential tax cut which is currently in the works. Yesterday’s approval of a budget blueprint by the Senate for next year alleviated the obstacles for the Republican majority passing a tax cut package without the support of their Democratic counterparts.

As reported by Reuters, Bill Northey, chief investment officer at the private client group at U.S. Bank said, "This is clearly a picture of somewhat of a risk-on rotation today, and it's ignited some of the animal spirits as we take another step closer to the potential for tax reform coming to fruition. Because from the standpoint of what has the potential to impact economic trajectory and capital markets trajectory, it really is tax reform”.

Wishing you as always, good trading,