Last week, the Federal Reserve released its monetary policy statement. In the statement, the bank announced that it would leave interest rates unchanged. This was expected. What was not expected was the hawkish tone from the bank. The Fed officials said that the US economy was strong enough to handle another rate hike. This left chances open for another rate hike in December this year.
Before the Fed statement, investors and analysts were torn about the future of rate hikes. This had led the probability of a December rate hike dropping to below 70%. This is because of a number of reasons. First, while the US economy is doing well, there are concerns about the future of this growth. For example, in the second quarter, the economy expanded by 4.2% and then declined to 3.5% in the third quarter.
Second, in the recent earnings season, many companies lowered their forward guidance for the full year. Many of those companies attributed the reduced guidance to the strong dollar.
Third, the Fed has been under attack from the US president. He has accused it of working against his pro-growth agenda. He has also expressed regrets for nominating Jerome Powell as the Fed chair. While the Fed is usually an independent body, a number of analysts expected it to probably react to the attacks.
Fourth, there are concerns about global growth. Just last month, IMF released a report that lowered the global GDP forecast. The results of these forecasts have started to emerge. Last week, the European Commission released a statement that lowered the GDP forecast for the next three years. Therefore, some analysts expected the Fed to put brakes on the rate hikes.
As a result of the Fed statement, the US dollar rose sharply. As the dollar rose, gold was a big loser. Yesterday, the XAU/USD pair declined to a low of 1200. This was the lowest level since October 11. This ended a bullish trend that was developing in the past month. As shown below, on the four-hour chart, the pair’s 30-day EMA is trading in the outside of the 15-day EMA. At the same time, the RSI has remained in the oversold level for the past few days. Therefore, there is a likelihood that the pair may continue moving lower to test the 1180 level. However, this will depend on the trend of the US dollar after the CPI data is released later this week.