Buying or selling over speculation

The Federal Open Market Committee raised for a second time in three months its benchmark rate by 25 basis points to a range of 0.75 percent to 1.00 percent. But that was no surprise.
According to fed funds tracked by CME Group’s FedWatch program, traders were pricing in nearly a 95 percent chance of a rate hike in March. Now, if you were checking on markets that day or even today, you have probably noticed that gold prices jumped after the rate decision.
Gold is a dollar-priced commodity that is usually coming under significant pressure when the Federal Reserve increases rates. Higher rates make the dollar stronger and the yellow metal less competitive for investors holding foreign currencies. So why it went up on Wednesday?
There is a common market saying “buy the rumor, sell on fact”. This might be one of the keys to understand such inexplicable dynamic. In other words, it’s all about speculation. Ahead of the FOMC meeting, bullion futures had dropped to multimonth lows.
The downtrend was accompanied by increasing expectations for a rate hike this month. Market players were opening positions in anticipation to the main event and therefore, starting the party before anyone’s birthday. When the FOMC announcement hit markets, everyone felt too tired to keep dancing and decided to take profits and open long positions, sending prices to the sky.
As there is a negative correlation between benchmark rate hikes and gold prices, the market phenomena mentioned above also inverses to “sell the rumor, buy on fact”. This is a common strategy proper to be used ahead of big events such as FOMC meetings, referendums, elections and others. However, it should be kept into account that there are high risks involved.

Try it yourself…?
The Federal Reserve is forecasting another two hikes later this year, possible in June and December. But that will depend on the economic reports.
Once you see that inflation and employment are displaying solid results and Fed Chair Janet Yellen opts for a hawkish tone together with other FOMC officials, it’s time to move. Check on CME Group’s expectations for a rate hike and take as a reference of what markets players think.
If you are speculating on a rate hike, few days before the event go short on gold and long on the dollar. Once data is confirmed, don’t forget to close your positions.