Yellen testimony amp likely gold impact

As Federal Reserve Chairwoman Yellen is set to testify to Congress Tuesday and Wednesday, gold traders wonder about the extent to which, she will continue to play down inflation, considering the recent upside surprise figures in CPI and PCE price index.  While the FOMC has all but assured that tapering would be concluded in October, the countermove to such assessment (aimed at preventing a jump in yields) is to continue to talk down inflation as well as the improvement in labour markets.  And what about Yellen’s impact on metals?  Here is a look the gold impact of Yellen’s most notable speeches so far this year, accompanied by a chart below:

Feb 11 – Yellen’s first Congressional testimony

Yellen boosted metals as she stuck to the Bernanke script, emphasizing that tapering of asset purchases did not necessarily imply tightening of monetary policy. Yellen’s lack of concern with disinflation risks stood out throughout the testimony as she attributed part of the slowdown in prices to falling cost of petroleum imports, while remaining confident that better growth would push inflation back to the Fed’s preferred 2.0% threshold.

Mar 19– Yellen’s first post-FOMC meeting conference

Gold fell $26, while USD and yields jumped sharply as the FOMC announcement issued more hawkish projections from Fed participants, which showed five members expecting 1.0% fed funds rates by end of 2015, three more members than those projecting a similar outcome in the December meeting. Yellen clearly contributed to metals’ damage when she made the unusual step of shedding detail on the timeline elapsing between the conclusion of the tapering and the start of first rate hike of “about 6 months”. The period was about 3-6 months earlier than markets were expecting.

May 7– Yellen’s Congressional testimony

Yellen’s testimony failed to provide any fireworks but the market detected a slightly dovish bent a she followed up on the FOMC’s optimistic statement. The testimony did outline the downside risks to inflation and labor markets, which left markets with the conclusion that Yellen was in a hurry to to raise rates.

June 18– Yellen’s second post-FOMC meeting conference

Just as markets were expecting a hawkish Fed nod following the prior day’s release of stronger than expected US CPI, the FOMC statement was little changed. Yellen from her side, largely departed from the rough six-month timeline in the March FOMC and continued to played down inflation pressures.

Gold bears may hold faith in Yellen’s playing down of inflation, but additional inflation news from the June 26 release of the core PCE price index showing May inflation at a 15-month high of 1.5% could alter sentiment. There has been no convincing explanation to today’s $30 decline in the price of gold (biggest single day decline of the year) aside from summer doldrums and profit-taking ahead of a busy week, including Yellen’s testimomy.  Those touting gold’s seasonal summer rebound have already seen an 8% rise from the June lows. Yellen will likely reiterate the Fed’s range of policy and liquidity tools available to address any set-backs after tapering is concluded by autumn. During the 3-4 hours of tomorrow’s testimony, there will be plenty of analysis and open-ended statements favouring bulls and bears alike.

Initial support starts at $1290-95, but a close below $1292 will be crucial, as it confirms the breach of the June 5^th trend line and the 55-DMA. Bears will be nervous if the 200-DMA at 1285 is also breached, which would give way to the more momentum-inducing threshold of $1255-60. At this juncture, we anticipate a prolonged consolidation around $1270-1300 before a gradual revisit of $1350s.