Gold Shines Ahead of Fed Rate Cut

Markets are sure that the FOMC will cut rates this week, amid growing expectations that the Fed will continue easing through the rest of the year, weakening the dollar and fuelling gold prices.

Key Points Moving the Markets

• Unanimous agreement that the Fed will cut by at least 25 bps at the September meeting
• Focus on updated Fed economic forecasts, including the "dot plot" matrix, to gauge chances of a rate cut at the October meeting.
• Markets are pricing in over 80% of two more rate cuts after September.
• Powell's post-rate decision press conference is in focus as markets seek reassurance that the October meeting will include a rate cut.

The First Cut of the Year

The market has fully priced in a rate cut at the conclusion of the Fed's FOMC policy meeting on Wednesday, in the middle of the US trading session. A slight disagreement is about how much the cut will be, but the chances of a "jumbo" 50 bps have been diminishing lately. Last week saw an unexpectedly bad jobs report, with the number of jobless claims initially jumping to the highest level in four years. However, it later emerged that the unexpected spike in unemployment was the result of attempts at fraud in Texas and will likely be revised downward.

Given the strong consensus, the focus will likely turn to what to expect from the October meeting. According to the Fed's dot-plot matrix, there should be two rate cuts in the second half of the year. The Fed will update its outlook for the year at this meeting, which could be pivotal for the market's rate outlook. The last projections saw the Fed expecting inflation above target at 3.1% by the end of the year. If that is maintained or raised, it could portend hawkishness from the Fed, but if it is reduced, the markets might start pricing in three rate cuts. There are only three rate decisions left (including Wednesday), so the Fed would have to cut in October and December too. If Fed Chair Powell doesn't leave the door open for that second rate cut, then the markets could come away with a hawkish impression of the Fed's outlook.

The Case For More Cuts

Both Morgan Stanley and Deutsche Bank expect 75 bps of easing from the Fed over the subsequent three meetings, citing a weaker economy and rising unemployment. Presumably, economic deterioration would supersede the signs of warming inflation. Lower rates would be expected to continue fuelling the recent gold rally, as they would lead to weaker demand for treasuries. However, there is the risk that markets have priced in too much of the Fed's pivot, and a more cautious approach to rate cutting could leave markets reeling. The market reaction could come down to an interpretation of Powell's phrasing at the post-rate decision conference, as he tries to walk the line between expressing concern over the labour market and talking down inflation expectations.

Gold Pushes Higher Ahead of FOMC

After three weeks of solid gains following the Jackson Hole Symposium in August, the upward trajectory of gold had taken a breather over the last week. But it appears to have been just a temporary pause even ahead of the Fed's rate decision, as the RSI extended to the overbought zone and gold to record highs. A continuation of the upward move would clear the way towards the round $3750 level if $3700 gives way to bulls. If the Fed appears more hawkish than anticipated, then gold prices could turn around as the RSI shows a double divergence. Support below $3670 could be seen at last week's low, which coincides with the lower Bollinger Band at $3620, with a breakdown heading towards the prior swing high of $3580.

Source: SpreadEx | Gold, Spot