Lack Lustre Gold Ahead of Fed Decision

Today’s Federal Reserve decision is widely anticipated to deliver no surprises, with interest rates expected to remain on hold.

The market is pricing in a mere single-digit percentage probability of a rate cut by the Fed at today’s meeting. Despite repeated calls for easing from Donald Trump, who has even floated the possibility of seeking grounds to dismiss Chairman Powell, the central bank is likely to remain resistant to administration pressure. The Fed currently faces a complex dilemma: on one hand, US-imposed tariffs are already generating inflationary pressures, while simultaneously posing a threat to the labour market in the event of an economic slowdown. Conversely, labour market data remains robust, and while inflation has moderated, numerous indicators suggest a potential rebound. Consequently, the question arises whether a prolonged period of unchanged interest rates lies ahead.

Inflationary Headwinds Looming

March inflation figures in the United States registered a notable decline, reaching 2.4% year-on-year, equalling the lowest level since September 2024 and the weakest reading since February 2021. This moderation is largely attributable to falling fuel prices, without which such a sharp deceleration would likely not have been observed.

While the current meeting will not include updated projections, considering the impact of tariffs and a clear resurgence in price sub-indices within regional surveys and ISM indices, it is reasonable to anticipate that inflation will once again become a salient issue in the US. This is precisely why the Fed must await the tangible impact of tariffs on price levels. Bloomberg suggests that the forecast for core PCE inflation could be revised upwards to 3.5% for this year during the June meeting, a significant increase from the 2.8% projected in March. Concurrently, a substantial downward revision of 0.8 percentage points is expected for GDP growth forecasts, bringing it down to a mere 0.9%. This, in turn, could imply a marked upward adjustment to unemployment rate projections. As such, the Fed confronts a challenging situation: rising inflation on one side, necessitating stable or even higher interest rates, juxtaposed with the need for rate cuts to mitigate a potential rise in unemployment.

Regional indices have surged in recent months, again pointing to a growing inflationary problem. Source: Bloomberg Finance LP, XTB

The Path Ahead for Rates

The Federal Reserve’s own projections indicate two interest rate cuts this year, although this assessment dates back to March. In contrast, the market is currently pricing in as many as three rate reductions this year, with the initial expectation pointing towards July as a potential timing for the first cut. However, as Bloomberg highlights, based on current inflation growth forecasts and applying the Taylor rule for interest rates, the Fed should maintain current rates for the remainder of the year, and potentially even consider a hike if inflation data surpasses expectations. This is not, of course, the baseline scenario for either the market or the Fed policymakers themselves.

The market continues to anticipate three interest rate cuts this year, despite significant upside risks to inflation in the latter part of the year. Source: Bloomberg Finance LP, XTB

Market Reaction in Focus

Gold is traditionally viewed as a safe-haven asset, and consequently, it has seen significant appreciation amidst the prevailing uncertainty. Yesterday witnessed a record closing price for gold, at $3,430 per ounce. While the precious metal opened higher today, it is currently experiencing losses due to potential discussions between the US and China regarding the easing of tariffs. Although a Fed decision to maintain interest rates is typically seen as negative for gold, the asset has gained ground during periods of high rates recently. Therefore, it can be anticipated that the risk of elevated inflation could steer investors towards assets other than the US dollar. Consequently, heightened volatility in gold prices can be expected following today’s Fed announcement. A neutral stance from the central bank could be supportive for gold, whereas a clear indication that rate cuts are off the table this year, or that hikes are even possible, could trigger a significant pullback and a retest of the $3,300 per ounce level. Currently, key support for gold lies around $3,250 per ounce, coinciding with the 25-period moving average and the largest correction within the multi-month uptrend.

Source: xStation5

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