Gold Prices and US Dollar’s Outlook Hinge on Powell’s Guidance

July FOMC Meeting Key Points:

• The Fed is expected to raise interest rates by 25 basis points to 5.25%-5.50%.
• With the price of a quarter-point rally all the way up, attention should be on tightening the roadmap
• Powell will likely provide guidance on the political system’s view during his press conference

Most read: CAD Forecast – USD/CAD is in a consolidation triangle ahead of the Fed’s decision

The Federal Reserve is scheduled to conclude its July monetary policy meeting on Wednesday afternoon. Wall Street expects the FOMC to resume its hiking campaign after a one-month hiatus, raising its benchmark rate by 25 basis points to a range of 5.25% to 5.50%, the highest range since 2001. The move was fully priced in, so it wouldn’t be a strong source of volatility in and of itself. For this reason, policy guidance should be the primary focus for traders and investors alike.

No summary of the economic outlook will be provided this time, but Jerome Powell will, as usual, hold a press conference following the announcement of the central bank’s decision. Although a weaker-than-expected US CPI report for June argues for a less aggressive stance, the Fed chief may be tempted to deliver a hawkish message to prevent financial conditions from easing too much and to preserve discretion in case inflation picks up in the coming months, when fundamental effects from the annual data ease.

If Powell signals that more work is needed to restore price stability, and signals that another hike is coming, expectations for the Fed’s final interest rate will dip to the upside, boosting Treasury yields, especially those at the front end of the curve. According to futures market data, bearish positions against the US dollar have reached extreme levels in recent weeks, so many speculators may fall into the wrong position and be forced to cover their positions at a loss in case of a hawkish outcome, resulting in short pressure.

A short squeeze may lead to a strong rise in the US dollar, which will have a negative impact on precious metals. This could mean some losses for gold (XAU/USD) and silver (XAG/USD) in the short term, but it wouldn’t necessarily translate into a major sell-off in the space, because even if policymakers do run higher, the normalization cycle is undoubtedly almost over as things look today.

Although, traders are also unlikely to consider a scenario in which Powell drops his tough rhetoric and adopts a softer tone. If the FOMC chair appears non-committal on further tightening and hints at an aggressive data-driven approach going forward, markets may attempt to manage the subsequent easing cycle, resulting in US weakness. This will be positive for both gold and silver.

The next federal decision

source: DailyFX Economic Calendar