Gold Prices Subdued as Investors Await FOMC Meeting

As of 5:30 PM EDT, gold futures based on the most active June 2024 contract are down $2.10, or -0.09%, settling at $2347.50. Today's decline would have been more significant if not for the dollar's weakness. The dollar is currently down -0.26%, taking the dollar index to 105.525. A neutral dollar would have resulted in gold losing more ground, as gold is directly paired against the dollar for value.

The Federal Reserve will commence its two-day Federal Open Market Committee (FOMC) meeting on Tuesday, concluding on Wednesday. It is widely anticipated that the Federal Reserve will leave its benchmark interest rate (fed funds rate) unchanged. According to the CME's FedWatch tool, there is a 94.6% probability that the Fed will maintain its current rates and a 5.4% probability that they will cut rates by ¼%, which would take their benchmark rate to between 5% and 5.25%.

At the conclusion of this week's FOMC meeting, the Federal Reserve will release a statement, and Chairman Jerome Powell will hold a press conference. According to the UBJ, "Forecasts from futures markets indicate a high degree of certainty that interest rates will remain unchanged, with only a negligible chance of a rate cut. Since July 2023, the FOMC has maintained a steady federal-funds rate target, holding it within a range of 5.25% to 5.50%. This steady stance reflects the committee's cautious approach, particularly in light of recent inflationary pressures."

However, market participants will be intensely focused on the Fed's plan regarding its balance sheet management, which is expected to draw significant attention.

Author Rahul Kumar noted, "The Fed wields influence over monetary policy not only through interest rates but also via its actions in the repo market and adjustments to the size of its balance sheet. Quantitative easing (QE), a strategy involving the purchase of large quantities of assets, injects liquidity into the financial system, while quantitative tightening (QT) involves reducing the balance sheet by allowing assets to mature without reinvestment. Since June 2022, the Fed has embarked on a path of QT, gradually reducing the size of its balance sheet. Powell's recent indications of slowing the balance-sheet runoff signal a potential shift in strategy, with expectations of a formal plan announcement in May and a subsequent reduction in the monthly pace of balance-sheet reduction."

The Federal Reserve has been steadily decreasing assets from its balance sheet, which peaked in 2022, and decisions on QT are separate from the Fed's decisions on interest rates.

It seems likely that the vast majority of investors will await the Fed's guidance before making major decisions on their investment portfolios, including allocations to gold and U.S. equities.

Wishing you as always good trading,