(Kitco News) - What a start to 2016: U.S. stocks plunged over 10% in a panicked and swift correction that may or may not be over. Crude oil prices tumbled below $28 per barrel last week before recovering back above $30. Again, a bottom may or may not be forming in crude oil. And, then there is the U.S. dollar index –up modestly since the start of the year, but overall locked in the same neutral range that has confined the market since March 2015.
All eyes on the Fed: Amid the increased global market volatility and uncertainty, analysts have quickly backed away from forecasts for a rate hike at the March Federal Open Market Committee (FOMC) meeting. Last week, Credit Suisse issued a research report stating they believe the probability of a first quarter rate hike has slipped below 50% and they aren't alone.
What is the silver lining for gold? As expectations for future Fed rate hikes are ratcheted back—it will remove support for the U.S. dollar index. Sure, the dollar gained in 2015, but the majority of the gains were achieved in the first quarter. Since March, the U.S. currency has vacillated in a large, but neutral sideways trading range. See Figure 1 below, a daily chart of the U.S. dollar index.
Since March 2015, the U.S. dollar has held between 100.39 and then 100.51 on the upside and support at 93.13-92.62 on the downside.
What's the risk here? If the Federal Reserve finds itself hamstrung on future rate hikes, the U.S. dollar will begin to slip lower within that large range. The U.S. dollar rallied significantly since May 2014 (a low at 78.90) –as the currency "priced in" expectations for future U.S. rate hikes. And, what do we have so far? One .25 basis point rate hike barely lifting the federal funds rate off the zero bound level. If the Fed begins to backpedal away from the expected three to four rate hikes in 2016, the dollar will begin to deflate.
Dollar declines are gold bullish. If the U.S. dollar begins to slip toward the lower end of its large multi-month trading range that would remove a headwind for the gold market.
Market turbulence, economic uncertainty and fewer rate hikes could trigger a corrective unwind in the U.S. dollar as traders begin to "deprice" expectations for the number of rate hikes already baked into the cake.
Bottom line: Keep an eye on the dollar. Fresh weakness ahead could prove to be gold supportive.
By Kira Brecht, contributing to Kitco News;
Follow her on Twitter @KiraBrecht
