The Federal Reserve monetary policy announcement later today will be the most important economic event of September.
Although the central bank is widely expected to leave interest rates unchanged, much of the focus will be directed towards the economic projections, Powell’s press conference and updated ‘dot plot’ forecast of interest rate moves. Given how this will be the first meeting after the Fed announced its new average inflation targeting (AIT) framework, there could be some volatility in the Dollar as investors sift for clarity during the meeting.
Back in June, policy members projected GDP to decline 6.5% in 2020 while unemployment was seen rising 9.3%. However, the current unemployment rate of 8.4% is already below the medium forecast - something that could allow the Fed to express some confidence over the US economy.
Let’s be honest, the US economy is certainly not out of the woods yet despite the improving unemployment rate.
Rising coronavirus cases in major states coupled with the congressional stalemate over a new fiscal package remain major threats to the country’s economic outlook. Markets expect the Fed to signal that interest rates will remain unchanged and close to zero through the end of 2023! But It will still be interesting to hear Jerome Powell’s thoughts on the latest developments, in addition to how high or how long the Fed will allow inflation to overshoot the 2% target.
What does this all mean for Gold?
Gold seems to be drawing strength from a softer Dollar this morning as anticipation mounts ahead of the Federal Reserve meeting.
Regardless of the choppiness witnessed over the past few weeks, the precious metal remains underpinned by low-to-negative government bond yields, rising COVID-19 cases in the United States and a tired Dollar.
Price action suggests that the precious metal is in search of a fresh directional catalyst to breakout of the current range. This may come in the form of the Fed meeting today.
After the Federal Reserve’s policy shift to let inflation rip, the big question on the mind of many investors is how will the central bank put this policy to action? Clarity on this could provide Gold a tailwind as the metal is seen as a hedge against inflation. Additionally, a dovish sounding Fed could weaken the Dollar, further supporting Gold prices.
Looking at the technical picture, strong support can be found around $1910 and resistance around $1985. The solid daily close above the $1952 intraday resistance level may open the doors towards $1985. If $1952 proves to be unreliable support, prices may decline back towards $1910.
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