The FOMC announces its interest rate decision tomorrow at 6 pm GMT. After three consecutive rate cuts which ended in its October 2019 meeting, the Fed has held fire. The impact of the 75 bps cumulative rate cuts is already being felt, with the US markets continuing to post record highs and employment numbers remaining relatively good. Consumer inflation numbers continue to remain benign, with annualized inflation remaining steady and the monthly inflation dipping slightly.
At its December meeting, the FOMC rate statement signalled that it wanted rates to remain within the 1.6% area. This figure is within the 1.5% – 1.75% band set by the FOMC; there is nothing to suggest a further decrease in rates at this time. Therefore, the markets expect the FOMC to stand spat.
The emphasis, however, will be on the press conference by the FOMC Chair Jerome Powell. No significant changes from his last address are expected. He may mention that downside risks to the economy have abated somewhat with the signing of the US-China phase 1 trade deal and the de-escalation of tensions between the US and Iran. Repo funding through the T-bill purchases that started in November will continue. However, the setup of a standing repo facility is not expected tomorrow.
With an expectation of no changes to the interest rate or economic forecast, tomorrow’s FOMC decision may not move the markets too much. Gold has mostly benefited from the safe haven purchases of investors who have been spooked by the coronavirus outbreak. I do not expect too much volatility on this asset except where the FOMC Chief Powell gives an unscripted response during the Q&A session.
Gold price continues to trade around 1570.22, which is a resistance level marked by previous highs in May 2011 and recently in the week ended Jan 6. A break of this area targets 1635 in the medium-term, with possible pitstops at 1613.13 (previous highs of Feb/March 2013).
On the flip side, an increase in risk appetite on the cooling of coronavirus fears could allow gold to retest 1566 or 1499, depending on the strength of such a move.