It’s been a wild ride in the markets this week. As recently as Monday, everyone expected a 50 bp rate hike from the Fed, but then an article from the Wall Street Journal – suggesting that the Fed is considering to shock investors with a 75 bp hike – quickly shifted market expectations and sent the US dollar to a fresh cycle high while risky assets sold off. 

The main reason behind the Fed’s surprise shift to an even more hawkish rate hike was last Friday’s higher than forecasted CPI inflation report. The Fed is now clearly getting worried about inflation becoming entrenched and has decided to hike even more aggressively, potentially hurting the economy and stock markets with it.

Still, the hawkish move was again well-telegraphed (even if only a few days before), and by the time the rate increase was delivered Wednesday night, the markets had already adjusted. In the end, all we got was a “buy the rumor sell the fact” reaction, with risky assets bouncing on the Fed meeting, while US Treasury yields fell and took the dollar lower with them.

Of all markets, precious metals are perhaps the most interesting again, given the sticky inflationary environment. Considered the ultimate inflation protection assets (though nowadays some investors may also place Bitcoin in this category), gold and silver have both been hard-pressed against their solid long-term support zones by the Fed’s hawkish actions. 

The key question for traders and investors now is, will the support here hold or break?

How things unfold in the following weeks will depend a lot on further communication from the Fed and new incoming economic data (especially inflation). If the Fed is really serious about fighting inflation, then they wouldn’t be afraid to hike rates even more aggressively than this and tighten even faster with QT. Such an outcome will be bearish for risky assets (stocks) and also for commodities and precious metals.

The initial market reaction to the Wednesday meeting (dollar down, stocks up, gold up) suggests that investors don’t think the Fed will fight inflation at all costs. If the Fed indeed caves in to fears of crashing the economy with the aggressive rate hikes and then switches to a more neutral or dovish stance despite the high inflation, the support in gold and silver will likely continue to hold.

However, this doesn’t have to prove correct, and in the coming weeks and months, we will find out which scenario plays out. 

In fact, the Fed could be willing and determined to fight inflation until the end, even if it means a nasty recession and a much deeper decline in stock markets. If the Fed presses with more hawkish moves (perhaps an even larger, 100bp hikes), then it could as well crash stock markets further, while gold and silver will probably break below this key support. 

The bearish case: 

• The support trendline doesn’t hold, in which case, a further extension to the downside will be very likely. The 1500 area for gold and 17-18 for silver look like the next destination for each.

The bullish case:

• Expect gold and silver to stay above the support line, but the current consolidation ranges (long-term weekly chart) will likely hold. That means the overall bias may remain slightly bearish as a major bullish move or upside breakout looks highly unlikely while the Fed and most other central banks are embarking on aggressive rate hike cycles.

With the major support trend lines being tested but still holding, the gold and silver market is actually testing the Fed, asking, can you do more to kill inflation? 

• If the answer is yes, then gold and silver will likely break lower this year. 
• If the Fed gets scared (answer is no), then gold and silver will stay above their respective support trendlines.