Gold traders are sitting on a tight rope today, thinking about what could happen to US monetary policy and how much information the Fed chairman will release. It is very much a given that the later part of the day is going to be highly volatile, and if things don't match expectations, we could see some real fireworks today.
The FOMC Minutes
Investors and traders will closely monitor the FOMC Minutes, set for release at 7 p.m. UK time. Most traders have now very much priced in the possibility of a rate cut of 25 basis points, as inflation has shown that things are improving. However, according to the latest US CPI y/y reading, which came in at 2.9%, inflation is still well above the target of 2%. So, the Fed can always use this as an excuse to wait a bit longer and hold fire until they have full control over things.
However, many experts believe that the situation has changed for the better. Connor Woods, analyst at HowToTrade.com, said that “central banks need to adopt to a new reality, as metrics that used to work before do not have the same power to measure the true nature of inflation as COVID has changed things permanently.”
The question is, what could potentially happen if the Fed Minutes indicate that they still want to wait and see? Although this is a very low probability event, one should always be prepared for all scenarios.
If the Fed minutes show that there is less appetite among Fed members to cut the rate in their September meeting, we are likely to see a scenario that would be highly bearish for equities and gold. Woods said, "Any indication they may not cut interest in September would significantly boost the dollar, which would be potentially highly bearish for gold prices."
On the other hand, if the FOMC minutes indicate that the Fed is prepared to lower rates and the market anticipates a rate cut in September, this would be a positive development. However, a significant positive impact would only occur if the FOMC minutes reveal an interest rate cut of more than 25 basis points, as the gold price equation fully incorporates anything close to 25 basis points.