Fed Meeting is This Week’s Main Event

Gold poked its head above $3700 ahead of the Fed meeting which is expected to usher in a period of lower interest rate conditions in the US. Gold’s ascent to $3700 was aided by the decline in the USD and by bets that the Fed may signal that follow-up rate cuts are likely to arrive before year-end. Profit taking around the $3700 level saw the precious metal dip back below this mark. But should the Fed adopt a particularly dovish tone in their meeting, gold could be making another move higher. The risk for gold is if the Fed’s Summary of Economic Projections (SEP, or ‘Dot Plots’) is not as dovish as the market is expecting. Levels to watch include support at $3675, $3661, and $3633. Resistance awaits at $3703 and $3720.

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The oil price has been pushed higher by further strikes by Ukraine on Russian oil infrastructure, which has taken some Russian oil supply away from the market. Oil is also getting a lift from the prospect of lower interest rates coming into effect in the US which could boost demand, and the move lower in the USD. US crude prices have gained 2.6% this week so far, with support at $63.12 and $62.05, and resistance at $64.90 and $65.54.

Despite a better-than-expected retail sales result for August, the US Dollar has come under renewed selling pressure this week ahead of the Fed meeting. Better German economic sentiment data helped the EURUSD rate climb to a 4-year high, which contributed to the DXY (Dollar Index) slipping below the 97 level. The DXY is now trading at 96.60, below resistance at 96.90 and just ahead of support at 96.50. The Dollar is looking rather unloved by investors at this point ahead of an expected Fed rate cut but should the central bank’s economic projections not be as dire as expected the Dollar could be due for a bounce.

The Fed meeting is the main event as far as markets are concerned, and while a quarter point cut is essentially already baked into current market pricing, the focus is on how far the Fed’s concerns have shifted from inflation to what is clearly a stuttering jobs market. Downward revisions of nearly one million jobs (911k) and a most recent non-farm payrolls figure of just 22k will surely have caught the attention of the Fed Board.

While US inflation is hovering near 3%, the jobs market is arguably where economic alarm bells are ringing loudest for the Fed. While the Fed does have a dual mandate to take care of both inflation and the labour market, we will be looking to see if the Fed’s messaging reflect a shift in priorities comparted to previous meetings. Whether investors leave the Fed meeting expecting one or two more rate cuts by year-end could determine how stocks and other risk assets perform for the rest of the week.