Gold on Watch as FOMC Decision Looms

Although lower today, gold has been a lot more stable in recent times ever since hitting a low of $1160 in mid-August. From there, gold staged recovery to reach a high so far of just under $1215 around end of August before going into consolidation mode and thus giving back a few bucks worth of gains. The metal’s rebound has coincided with the Dollar Index drifting lower from around the same time from a peak of almost 97.00 to a low so far of 93.80. Interestingly, the perceived safe haven metal has not reacted negatively to the fact the Dow has hit a new record high recently. In other words, gold’s volatility remains pretty much a function of the US dollar, despite all its other uses. Consequently, gold’s next directional move may very well depend on how hawkish or otherwise the FOMC is today. As a rate increase is highly likely and therefore priced in, the reaction of the dollar will be influenced to a large degree by the Fed’s forward guidance and whether there are any noticeable changes in the dot-plots.

The market is keen to find out whether Fed officials will raise their expectations from the current three interest rate increases expected in 2019. My US colleague Matt Weller is among a growing number of analysts expecting that the FOMC will lean towards a more cautious, wait-and-see approach as far as rate hikes in 2019 are concerned. In large part, economists argue, that this approach is likely be because of the fact trade tensions between the US and her major partners including China have shown no signs of being resolved any time soon. At his press conference, Fed Chair Powell may make mention of tariffs and trade issues and their impact on the economy. If Powell is concerned about the economic impact of the import tariffs, then that may make him appear somewhat dovish and so we could see a bearish reaction in the US dollar and a bullish move in gold. Conversely, if the Fed is more upbeat than expected then that should be good news for the dollar, and bad for gold.

For now though, gold is holding below that key $1205/15 resistance range and is looking a little heavy within its consolidation range. We would only turn bullish on gold in the event it breaks through this $1205/15 resistance area and holds above it, or in the event a distinct reversal pattern is observed at lower levels first. Otherwise, there is little or no technical reason to be bullish at these levels given the fact that the lower lows and lower highs are still in place on the higher time frames.