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 a quarter-point hike fully priced in, attention should be on the tightening roadmap
• Powell is likely to offer guidance on the polity outlook during his press conference

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The Federal Reserve will 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 band since 2001. This move is fully priced in, so it would not 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 economic projections 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 the weaker-than-expected U.S. CPI report for June argues for a less aggressive position, the Fed chair may be inclined to offer a hawkish message to prevent financial conditions from easing too much and to maintain optionality in case inflation picks up in the coming months, when base effects drop out of annual data.

If Powell indicates that more work is needed to restore price stability and signals another hike is coming, expectations for the Fed’s terminal rate will drifter higher, boosting Treasury yields, especially those at the front end of the curve. According to the futures market data, bearish positions against the U.S. dollar have reached extreme levels in recent weeks, so many speculators may be caught wrong-footed and forced to cover their trade at a loss in case of a hawkish outcome, sparking a short squeeze.

A short squeeze could trigger a strong rally in the U.S. dollar, which would 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 would not necessarily translate into a major sell-off in the space, because even if policymakers hike further, the normalization cycle is undoubtedly almost over as things stand today.

Although less likely, traders should also consider a scenario in which Powell abandons his hawkish rhetoric and embraces a softer tone. If the FOMC chief sounds non-committal about more tightening and hints at a strong data-dependence approach going forward, markets may attempt to front-run the subsequent easing cycle, leading to U.S. weakness. This would be positive for both gold and silver.

UPCOMING FED DECISION

Source: DailyFX Economic Calendar