A changing Fed regime - key trades on Gold and USD

Chris Weston
Head of Research
17 June 2021
What you’re seeing in the USD and precious metals is a clear assessment of the Fed’s Average Inflation Targeting (AIT) regime.

I guess it’s not that the market feels they will abolish it altogether, but there's certainly some flexibility to it and this is causing volatility in the interest rates markets, and compelling USD shorts. There's many of them to pair back exposures and in turn, this is hurting precious metals.

AIT was designed in such a way that the Fed were no longer pro-active in setting monetary policy – for example, when their models saw inflationary pressures on the horizon, they would tighten policy. AIT was more about a reactionary function with the Fed moving to a more evidence-based model and only tightening when the whites of the inflation eyes were staring them firmly in their face.

That evidence is now seemingly in their sight and the bulk of the Fed is acknowledging it.

It’s easy to argue the AIT regime is the core reason why we’ve seen such low volatility in FX markets. Now with the Fed injecting some uncertainty into policy, will this low volatility world change? The trading community will certainly hope so.

With the US central bank effectively the price maker, other central banks can see the Fed taking a more hawkish turn and this allows them the flexibility to take a step forward towards normalisation without causing a strengthening of their currency. Conversely, the likes of the RBA and ECB can use this turn to their advantage and stay relatively dovish and allow their currency to depreciate – the Fed hold all the cards.


(Source: Tradingview)

Amid this change in markets our client flows in USD pairs and Gold have been sizeable and positioning in Gold is now skewed 77% long and 33% short (Silver is 83% long). In grossly oversold condition, the daily chart sticks out front and centre. $1764 should be everyone’s radar – if we’re going to see some reversion to a mean – perhaps the 5-day EMA towards $1800, then there's a clear stop for longs to lean on.


(Source: Tradingview)

I like a stronger USD, but in the immediate future its not hard to see some kick back, especially as we test key fib levels – whether that lasts is another thing.

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