Crude oil, dollar index falls while gold, silver prices rise ahead of US Fed rate hike decision

• Chair Jerome Powell and other committee members of the Federal Reserve are likely to announce a decision on rate hike on Wednesday, May 3.
• While the market has factored in a 25 basis points hike by the US Fed, a few analysts believe otherwise.
• Amid a situation of economic slowdown and failure in the banking crisis, crude oil prices have come down significantly in the last one year.

The prices of gold and crude oil are usually triggered by events like the US Federal Reserve’s decision on interest rates as they provide commentary on the economic situation, which impacts demand.

Both precious metals and crude reacted sharply during trade on May 3. Chair Jerome Powell and other committee members are expected to announce a decision on rate hike later today. While the market has factored in a 25 basis point hike by the US Fed, some analysts believe otherwise.

Apurva Sheth, head of markets perspective & research at Samco Securities feels the US Fed may surprise with a pause in rate hike.

“The market is discounting a 25 bps hike by the US Fed tonight. However, we believe there are high chances that the Fed may throw in a surprise with a pause in their policy meet. This may be simply because the gap between their interest rates and inflation has narrowed down to zero. Along with this, the banking crisis has deepened with First Republic Bank failure. The Fed wouldn't want to risk financial stability just when inflation is already headed lower,” said Sheth.

Crude oil prices fall on expectations of a hike in interest rates
Amid economic slowdown and banking crisis in the US, crude oil prices have come down significantly in the last one year. Brent crude price dropped 30% in the last one year and is down 1% on May 3 to $74 per barrel on weak demand prospects ahead of the FOMC decision later today.

Besides, crude oil prices fell about 4% since the last Fed outcome on March 22.

“The weakness in crude prices intensifies, after ending the week lower, prices continue to slump. Both benchmarks fell more than 5% to a five-week low on Tuesday, as US policymakers discussed methods to avert a debt default and investors braced for more rate hikes this week, which might dampen energy consumption,” said Prathamesh Mallya, AVP- research, non-agri commodities, and currencies at Angel One.

Besides, weak economic data in China, one of the biggest consumers of oil, has also impacted the oil prices. China's manufacturing activity unexpectedly fell in April, which is the first contraction since December.

“Energy prices are also under pressure after data from China released over the weekend indicated that factory activity in April declined sharply. China is the world's largest energy consumer and crude oil buyer,” said Mallya.

Meanwhile, the US dollar index, which tracks the greenback against the basket of currencies, slipped by 0.36% on May 3 ahead of the FOMC outcome, to 101.59. While the market is expecting a 25 basis points hike, key focus also remains on the monetary policy commentary going forward on rate hike decision.

Gold gets dearer as investors flock to safe haven assets amid fears of a recession

The uncertain macro environment triggered by the war between Russia and Ukraine, high inflation across the globe, rising interest rates and now the banking crisis in the US and Europe – all make a case for buying gold.

On May 3, the price of 10 grams of gold rose to ₹61,640 in Mumbai from ₹60,760 on May 2.

Gold prices have been rallying this year amid the economic slowdown fears, as the yellow metal is considered as a hedge against inflation and a safe haven compared to assets like equities, bonds and currencies.

A mild recession and weaker earnings have historically been gold-positive. A further weakening of the dollar as inflation recedes could provide support for gold.

“Gold was on course for its biggest daily gain in a month, as yields fell on fresh fears of contagion in the US banking sector ahead of the Federal Reserve's widely anticipated interest rate hike. While gold is regarded as a hedge against economic uncertainty, rising interest rates reduce demand for the zero-yielding asset,” said Mallya.

Price of silver has rallied in the last few months, as industrial demand also saw a pick up. Besides, a recent fall in the US dollar and rising prices of gold may also attract some buying opportunities in silver. On May 3, the price of 1 kg silver rose to ₹76,800 from ₹76,100 on May 2.

SEE ALSO: Go First Impact: Market capitalisation of 3 PSU Banks down by ₹7,500 crore as investors fret over their exposure to ailing airline
New jobs for old: Media, govt, tech sectors see highest labour market churn