'Need Greater Confidence In Inflation..': US Fed On Possible Rate Cut In September; Impact On Gold, Dollar?

While keeping key interest rates unchanged, US Federal Reserve Jerome Powell-backed committee nods to the possibility of a rate cut in September policy, noting at the progress in inflation rate. However, Fed did not commit to the trajectory but neither denied it. Fed believes that it still needs "greater confidence that inflation is moving sustainably towards 2%" before pulling down the rates.

After two-days policy meeting, FOMC members led by chair Jerome Powell decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent.

During the press conference, when asked about a possible rate cut in September, Powell signaled that the scenario could be on the cards. He stated that the broad sense of the committee is that the economy is moving closer to the point at which it would be appropriate to reduce our policy rate.

However, Powell also stated that when the totality of the data, the evolving outlook and the balance of risks are consistent with surging confidence in inflation and maintaining a solid labor market --- are met -- then lowering interest rates could be on the table as soon as the next meeting in September.

Powell highlighted that the Fed can weigh prices and examine labour market data more equally as inflation is consistently cooling. On the employment front, Powell said that the indicator has gradually normalized from overheated conditions.

Powell emphasized that the FOMC is keeping a close watch on the unemployment rate and the potential weakness in the labour market.

At present, the US inflation annual rate tumbled for a third consecutive month to 3% in June 2024, which is also the lowest print since June last year. This is also better than estimates. Also, the country's annual core inflation has further slowed to a fresh low since April 2021 to 3.3%.

Meanwhile, the unemployment is at 4.1% currently which is still below the central bank's natural rate of unemployment target of 4.2%.

According to Powell, the latest inflation print has added to FOMC's confidence, and further cooling could only strengthen that confidence for a rate cut. Hence, Powell continued to reiterate that FOMC members still need greater confidence that inflation is moving sustainably towards 2%.

How will this impact Gold and Dollar?

Impact On Dollar?

Right after the US Federal Reserve meeting, the US dollar index aka DXY which lost ground earlier on Wednesday, mildly recovered losses after the policy outcomes.

Another reason for the dollar to slide before Fed policy was the strengthening of the Japanese Yen after the Bank of Japan hiked key rates. The greenback dipped 1.02% at 151.2 Japanese yen.

According to ING, the Jackson Hole Fed symposium in late August is another chance for the Fed to signal a September rate cut.

Giving a technical view, FX Street stated that despite a promising weekly start, the DXY index is experiencing a downturn, falling below both the 20-day and 200-day Simple Moving Averages (SMA). These two indicators seem to be converging toward a bearish crossover at around 104.00, which could add more selling pressure.

FX Street report also said that the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD), although not fully recovered, demonstrate a gradual return to neutral territory, but if they jump to positive terrain, the DXY is poised for further downside. The support level seen in DXY is at 104.15 and 104.00 levels, while resistance is likely to be in the range of 104.50 and 105.00 levels against the basket of currencies.

What about gold?

In Kedia Advisory's view, the FOMC meetings are critical for gold prices as they influence interest rates and economic policy, impacting investor behaviour and market trends.

Moreover, in its long-term outlook, Kedia stated that with the technical setup and the Cup and Handle Pattern suggesting a target of $2,700, the long-term view for gold remains bullish. The key support at the 100% Fibonacci level of $2,075 is crucial. As long as prices stay above this support, the bullish momentum is expected to continue towards the $2,700 target. Investors should monitor FOMC meetings and macroeconomic indicators, as these can influence gold prices significantly. Ahead, Weekly Jobless Claims and Nonfarm Payrolls later in the week also play a role in setting the tone for gold rates.

Currently, Spot Gold holds above $2,430 per ounce level. The indicator is near its all-time high of $2,483.78 an ounce.