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Gold Steady Ahead of FOMC Rate Statement

Gold has ticked upwards in the Wednesday session. In North American trade, the spot price for an ounce of gold is $1311.87, up 0.14%. In economic news, the US releases Existing Home Sales, which is expected to improve to 5.46 million. All eyes are on the Federal Reserve, which will release a rate statement at the conclusion of its policy meeting.

What can we expect from Janet Yellen on Wednesday? The FOMC is expected to hold the benchmark rate at 1.25%, so analysts will be looking for details about the the Fed balance sheet and a possible rate hike in December. Earlier in the year, the Fed outlined plans to begin reducing its bloated balance sheet of $4.2 trillion, and the markets are expecting more details, such as a start date for the tapering. The Fed is expected to reduce the balance sheet by not replacing some maturing bonds, starting at $10 billion/month, and gradually moving higher. This move can be viewed as a mini-rate hike, and could provide a boost for the US dollar against major rivals. However, if the Fed does not address its balance sheet, the markets could get nervous and the US dollar could lose ground. As for inflation, persistently low levels remains well below the Fed target of 2% and this has hampered plans for a third rate hike in 2017. Janet Yellen has not discussed a December move, but in recent weeks, some FOMC members have come out against another rate hike before inflation moves higher, even if this means waiting until 2018. If the rate statement addresses the timing of another rate hike, we could see substantial movement from the US dollar.

Gold prices are linked to interest rate moves, as the metal tends to move lower when interest rates increase. Keeping this rule of thumb in mind, traders should keep an eye on recent developments at the Bank of England. The pound jumped 3.0% last week, after the minutes of the BoE’s policy meeting strongly hinted at a rate hike before the end of the year. BoE Governor Mark Carney reiterated this stance at a speech to the International Monetary Fund on Monday, saying that monetary policy "would have to move". The BoE will hold its next policy meeting on November 2, and further hints about a rate hike over the next few weeks could weigh on gold prices.

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