Stock markets are still struggling a little for direction, with investors clearly heavily focused on the outcome of the Fed and ECB meetings.
In both cases, a 25 basis point rate hike is heavily backed in the markets, but at the same time the language that accompanies the decision and what comes next is less obvious.
I think there’s every chance that in both cases, policymakers opt to accept that a pause at the next meeting may be appropriate while in no way closing the door on further hikes in the months ahead.
In other words, data dependency will be heavily emphasized with the overall tone perhaps being a dovish hike with a slight hawkish twist. The last thing policymakers want is for investors to perceive this to be the end of the tightening process but that will be a very tough message to get across, particularly in the absence of fresh forecasts.
The economic data has undoubtedly improved as far as inflation prospects are concerned while the economy is clearly weakening, furthering the case for a pause in September. Both of these factors will likely be emphasized when signaling that further hikes will depend on the data.
Oil pares gains after being buoyed by better IMF forecasts
Oil prices are slipping a little on Wednesday, with traders potentially having an eye on the Fed decision later in the day after a strong run over the last month. Crude has recovered impressively since late June, buoyed by supply-side restrictions and better prospects for the global economy.
That was reflected in the IMF growth forecasts on Tuesday, with growth for this year revised up by 0.2% to 3%. Of course, those better economic prospects are still dependent on interest rates and traders may be slightly fearing a more hawkish message from the central banks that could threaten that.
Will a dovish Fed push gold back above $2,000?
Gold is creeping a little higher ahead of the Fed having spent much of the last week in correction mode. The yellow metal fell a little shy of $2,000 almost a week ago, perhaps held back a little by what the Fed may say later on today, with traders instead opting to lock in some profits.
Now it’s the moment of truth, is the Fed prepared to at least signal that the tightening program may now be behind us? They may not be so bold as to explicitly say that but gold bulls may rejoice in at least a hint that this may be the case. Any hawkish pushback could be bearish for gold at this point though and given the tendency to lean that way over the last year or so, there’s every chance the central bank maintains such a stance.
For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/economic-events/
Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA
