When the US Federal Reserve FOMC adjourns its meeting on Wednesday, it will deliver a statement to the media to chart the post-pandemic economy’s course.
The markets are pricing in with an almost 100% chance that the $120bn per month bond purchases will be scaled back before the end of November. However, there is uncertainty about what Fed Chair Jerome Powell will offer in terms of ‘guidance’. There’s a risk of him showing either too much or too little optimism; inflation and unemployment both cast long shadows over the FOMC’s agenda.
A firm, if non-committal approach, would appear the smartest and most likely outcome. The Fed will want to leave some wriggle room for future adjustments to monetary policy. Recent inflation and unemployment reports have shown those key drivers of policy currently hold a degree of inertia, and the one which frees up first will determine the Fed’s next step.
Markets are pricing in June 2022 as the month when interest rates will next rise, but any suggestion from Wednesday’s meeting that changes that prediction will likely send asset prices spinning. These are the key price levels to monitor to read the market’s response.
Gold traded in a tight sideways range between 23rd September and 13th October, and the upper range of that channel (1770) is now a key support/resistance level for the metal. After a strong breakout on 13th of October, gold lost steam and drifted back towards 1770, almost clipping it on 29th of October when it printed at 1772.
Gold 20th Sep – 3rd Nov
The euro has also been subject to bearish price pressure. The assumption that the Fed will start its tapering is now priced in. But any hints from the Fed that US interest rates rises might come into action sooner than expected would continue that trend.
Any strategies targeting the low of 1.035 would be long term in nature. That level dates back to 2016 and would form considerable support, but the long-term price action points to the path of least resistance being downwards.
Support/resistance levels that are closer to current price levels are 1.1565 and 1.1550. A test or break of these levels would reflect the market concluding the Fed’s policy is more hawkish than anticipated.
GBPEUR has spent 2021 trading in a tight range between 1.341 and 1.424. The pound’s current weakness against the euro carried over into the cable currency pair as well.
Should Powell hint at dovish monetary policy in the near future, there could be a break of the downward resistance trendline. Still, without such a move, price action points to further weakness and possible tests of support/resistance at 1.3605 and 1.3590.
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