Last updated on July 2nd, 2019 at 03:23 pm
Possibly the Most Important Fed Meeting of the Year
The emphasis on today’s Fed meeting is the divergence between market expectations and recent communication from the Fed. Indeed, the central bank has had a more dovish tone as of late. However, it has not clearly communicated intentions to cut rates.
And that is exactly what market participants will be looking for in today’s meeting. The futures markets have been pricing in about 50 basis points in rate cuts by the last meeting of the year. Unless the Fed shows commitment to exactly that, we may be in for a bumpy ride.
Specifically, it is forward guidance on a rate cut that stands to drive the dollar lower, and gold prices higher. There is a high expectation of a rate cut in July. If policymakers intend to move forward next month, they need to signal it today.
The Correlation Divergence Cannot Be Ignored
There is a clear implication that a dovish Fed stands to trigger a bearish dollar and a bullish stock market. Traditionally, this correlation moves a bit different. Gold, considered a safe haven, does not tend to move in the same direction as risk assets like equities.
What has made the current dynamic of economics different is inflation. Powell’s speech last week confirmed exactly that. Inflation is not what it used to be and small fluctuations can have a big impact.
Also, yields are increasingly important. With bonds rallying, and interest rates dropping, where else can investors go? This is a strong argument for a gold bull.
The hourly chart gives us some direction of where we go in the near-term. However, take a look at the weekly forecast for the broader pictures. Today is the main day that big levels in that forecast stand to be tested or possibly breached.
In the near-term, look for $1350 to continue offering a major hurdle. It has now capped rallies twice in a matter of days.
To the downside, there is ample support. There is a rising trendline, as well as the 200-period moving average. Slightly below that is a horizontal level at $1333. It would take a sustained move below the horizontal level to trigger some weakness over the next few days or weeks even. While above it, the yellow metal shows potential.