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What we need to learn from the Federal Reserve today

The Federal Reserve has raised US interest rates over the last year at the fastest pace seen in a generation, but this path is expected to conclude today

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Today should be remembered as another milestone event for the Federal Reserve. The United States central bank is widely expected to increase US interest rates and signal a conclusion to the fastest cycle of interest rate rises that we have encountered in a generation.  

If the Fed were to unexpectedly decide to leave US interest rates unchanged this month, this would spell out a clear message that the central bank is more concerned about the banking sector stress that is taking place than the narrative suggests. It would subsequently encourage wider financial market panic. This is why amid the backdrop of United States banks collapsing in recent months as well as economic releases, such as the GDP data last week spelling out that the largest economy in the world is slowing that the Fed will increase interest rates anyway.

If the Fed does not pull the trigger as markets have already priced in, it can cause more damage than benefit to global markets and this is why I ultimately still expect for the Fed to pull the trigger. While investor sentiment has been on the defensive and a choppy trading atmosphere has transpired given everything that has gone on within the banking sector, the wider fallout for global assets has been relatively contained. A sudden shift away from expectations can lead to a resurgence in USD demand as well as a market rout, and I do not think the Fed will want to take on such a risk of surprising investors.  

What the market desperately wants to hear from Chair Powell and Federal Reserve policymakers later today is where the monetary policy path is going to lead investors next. It is also expected that Fed officials will also be pushed to provide an updated opinion on their views regarding the turbulence taking place within the banking sector. The number of banks that have dropped is quite clearly not an instance of an isolated development, and the Fed needs to provide guidance on this.   

Moving forward we also need to know when the Fed will prepare financial markets for potential decreases to the United States interest rate. We have seen in recent weeks that expectations for a cut later in this year has now been pushed into 2024, but this does not mean the market can not react sensitively if Fed policymakers suggest that the economy cooling and signs of stress within the employment sector can lead to conversations taking place earlier regarding the need for lower interest rates.

Gold can use Fed event as reason for $2000 stay

The resilience of Gold buyers to push the precious metal back above $2000 shows the ongoing appetite for bulls to keep pricing in further gains. The levels that we are approaching in Gold are important because it is taking place during a period where the Dollar is actually very strong on a historic level. Investors can therefore be even more encouraged about potential excitement ahead should the USD gradually weaken.

The precious metal is now up just over 10% year-to-date and the fundamental side of where things stand allows conversations to take place regarding the upside potential for how high Gold prices can stretch. This is why Gold bulls will be hoping for a downbeat narrative from the US central bank today and would be particularly pleased if the Fed confirms that it is now done with rising US interest rates.

A signal weaker global economic data and specifically a slowdown in the US economy and employment sector will open the doors for an interest rate cut is seen as bullish, but if the Fed signal that persistent inflationary pressures could lead to monetary policy being maintained at current levels, or worse, possibly open the conversation for future increases to US interest rates then this would be a large blow to the resilience and enthusiasm of Gold traders.

This overall environment of global recession fears, banks collapsing, prolonged geopolitical unease and the future expectance of a weaker USD from a downbeat Federal Reserve represent music to the ears of Gold. I still do not see a reason why we can not be optimistic that a new all-time high for Gold can be in store for 2023, eclipsing 2020 levels.

As has been regularly pointed out one of the largest concerns with the economic slowdown is not how bad it will be, but how long it might last, and this represents just another tick in the box for Gold to be a central function of an investor portfolio.

Oil suffers largest decline since early January

If there was a global asset that we can say has been particularly sensitive to recession fears, it is Oil. WTI suffered its largest percentage decline since early January on Tuesday, and it does appear that these woes will look to extend into Wednesday trading.

The combination of banks collapsing, suggesting that investor confidence towards investments will suffer and that demand for energy was set for a decline anyway because of the world economy slowing suggests that investors will still be tempted to price in further declines in the commodity.

Yen is a possible winner from downbeat Fed

In the event that we do have a weaker Greenback moving forward or risk aversion taking place across financial markets, we should not rule out potential benefit for the Japanese Yen. We have seen on many occasions across recent years that if there is global financial market uncertainty that the Japanese Yen quickly comes to your aid as a best friend should do when you need support. Traders will seek companionship from the Yen if a round of global market weakness and risk aversion takes place.   

Some potential scenarios from the Fed today have not been priced in, such as an unexpected clear shift away from further rate rises or the Fed beginning to prepare the market for possible interest rate cuts as early as late 2023 and these developments can be seen as unlocking the doors for a gradually weaker USD.   

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