Gold's Rally Pauses as Investors Wait for the Feds Monetary Policy Decision

The recent rally in gold prices has taken a pause as investors and traders eagerly anticipate the Federal Reserve's upcoming monetary policy decision. This temporary halt in the precious metal's upward trajectory comes on the heels of a new record high, reflecting the market's cautious stance ahead of this crucial announcement.

Recent economic indicators have painted a picture of a resilient U.S. economy, potentially influencing the Fed's decision-making process. The Commerce Department's latest retail sales report showed a modest 0.1% increase in August, surpassing previous expectations. This data, coupled with a declining unemployment rate and an upward revision of the third quarter GDP estimate to a 3% annualized rate, suggests that the economy is stronger than it was perceived in August.

These positive economic signals have led to speculation that the Federal Reserve might adopt a less aggressive approach to rate cuts than previously anticipated. Despite this, the market still considers a rate cut at the upcoming Federal Open Market Committee (FOMC) meeting a virtual certainty. This expectation was solidified by Chairman Powell's statement at the Fed's annual retreat in Jackson Hole, Wyoming, where he indicated that "the time has come for policy to adjust."

The CME's FedWatch tool currently predicts a 100% probability of a rate cut in September. However, the FedWatch tool differs from the assumption that today's retail sales report lowered the probability of a 50-basis point cut, because the FedWatch tool see's the current probability of a 50-basis point at 63%, and only a 37% probability of a more modest 25-basis point cut.

This impending decision marks a significant shift in the Fed's monetary policy, representing the first rate cut since the central bank began its tightening cycle in March 2022. This is because tomorrow's announcement is expected to be more than just a singular event as it will signal the beginning of the Fed's interest rate normalization process. The central bank aims to gradually reduce interest rates from their current level of 5.25% - 5.50% to approximately 3.50% by the end of next year. Market consensus suggests that the Federal Reserve will implement roughly 1% in rate cuts over the remaining three FOMC meetings this year.

Given this outlook, many analysts anticipate a 50-basis point cut at tomorrow's meeting, followed by additional 25-basis point reductions at the November and December FOMC meetings. This gradual approach would align with the Fed's goal of achieving a soft landing for the economy while addressing inflationary pressures.

As investors await this pivotal decision, traders have used today’s retail sales report as a reason to take profits from gold’s historical new record price achieved last week. As of 5:30 PM EDT gold futures basis the most active December contract is fixed at $2596.40 after factoring in today’s $13.60 price decline.

While a fractional component of today’s decline can be attributed to dollar strength, most today’s decline is the result of traders actively bidding the precious yellow metal lower. 

Wishing you as always good trading,