Gold’s direction next week will be guided by the “tone” of the Federal Reserve

Next week the Federal Reserve will begin its sixth Federal Open Market Committee (FOMC) meeting this year. The Federal Reserve convenes and holds its FOMC meetings eight times per calendar year. It is during these meetings that Federal Reserve members discuss their economic projections and vote on any changes it will implement regarding their monetary policy such as rate hikes or cuts.

Expectations by economists and the financial industry are anticipating that the Federal Reserve will for the second consecutive meeting not raise their benchmark Fed funds rate. The Fed has raised rates at every consecutive meeting since its March 2022 meeting where they began a cycle of aggressive and restrictive tightening achieved by raising rates from between 0 and ¼% to its current fix between 5 ¼% and 5 ½%. This assumption can also be seen in the CME’s FedWatch tool which is currently predicting a 97% probability that the Fed will not raise rates next week.

Major monetary policy changes by the Fed are data-driven, and the data needed for a pivot by the Federal Reserve is data confirming that inflation is on a path to its 2% target. There remains some debate as to whether or not the Fed will implement another rate hike before signaling that they have concluded their restrictive rate hike cycle.

This means that market participants will listen and look for the “tone” of the Federal Reserve revealed by next week’s FOMC statement release, Chairman Powell’s press conference, or Fed members' comments for an indication of when they will conclude the rate hike as any information suggesting when they will begin to cut rates next year.

In an article by Reuters News, Deutsche Bank economist Matthew Luzzetti addressed this question, “Economic data since their June 13-14 meeting has persistently surprised to the upside given that rosier picture, Luzzetti - like most analysts polled by Reuters - says Fed policymakers probably won't lift the policy rate any further. They just are not ready to say so. If they declare the cycle done from a tightening perspective, that will likely lead to a significant easing of financial conditions – which I don’t think they want to deliver."

With the high probability that the Fed will not announce that they are done with rate hikes next week, it will be the tone and timbre of their statements rather than the content of their statements that will ignite a rally or lead to a continuation of the price decline that began on September 1st when gold hit $1980 and began the current price decline.

Wishing you as always good trading,