Gold eases heading into FOMC

After a fortnight of trending north, Gold has fallen over the past 5 days. It is currently trading at around $1960, showing a slight decline of approximately 1.35% from its recent high of $1987.53.

Price is currently trying to break out of the downward channel that it has been in since late last week, so something to keep an eye on going into the key economic data due out this week.

All eyes are now on the upcoming FOMC meeting, where the market is currently pointing towards a high probability (over 98%) of a 25bps rate hike on Wednesday.

Considering the historical inverse relationship between gold and the USD, let’s explore potential reactions by Gold to the FOMC meeting:

Rate Hike Scenario (USD Strengthens): If the FOMC goes ahead with the 25bps rate hike, it could lead to a strengthening of the USD. Higher interest rates tend to attract more investments into the US currency, potentially dampening demand for gold. Consequently, gold prices might face downward pressure in this scenario.

Rate Pause Scenario (USD Weakens): Conversely, if the Fed decides to maintain interest rates at 5.25% or hints at a more dovish approach, the USD could weaken. A weaker USD often prompts investors to seek refuge in gold as a hedge against currency depreciation and inflation. As a result, gold prices could see an uptick due to increased demand.

Source: CME Fedwatch tool

With the markets almost entirely pricing in a 25bps hike, unless we get a surprise in the figure, volatility may stay subdued until Fed Chair Jerome Powell begins his press conference shortly after the announcement. Investors and traders will be eagerly analysing his language to see if there are any hints on future movements by the Fed.