Highlights from the July FOMC meeting:
- The Fed is expected to raise interest rates by 25 basis points to 5.25% to 5.50%.
- A 1/4 point rate hike is fully priced and attention should be focused on the tightening roadmap
- Powell likely to provide guidance on national policy prospects at press conference
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The US Federal Reserve (Fed) will end its July monetary policy meeting on Wednesday afternoon. Wall Street expects the FOMC to resume its rate-hiking campaign after a month-long hiatus, raising the benchmark rate by 25 basis points to a range of 5.25% to 5.50%, the highest since 2001. The move is fully priced, so it’s not a big source of volatility on its own. For this reason, policy guidance should be the main focus for both traders and investors.
Fed Chairman Jerome Powell will hold a news conference after the central bank’s announcement, as is customary, although economic forecasts won’t be outlined this time. Although June’s weaker-than-expected U.S. consumer price index (CPI) report claims a less aggressive stance, the Fed chairman may be inclined to deliver a hawkish message to prevent financial conditions from easing too much and to remain selective in case inflation accelerates in the coming months when the base effect falls out of annual data.
If Fed Chairman Powell suggests that further efforts are needed to restore price stability, suggesting more rate hikes are coming, hopes for the Fed’s final rate will rise, especially for Treasury yields at the tip of the curve. Bearish positions against the US dollar have reached extreme levels in recent weeks, according to futures market data, which could trigger a short squeeze as many speculators are forced to make up losses in the event of a hawkish outcome.
A short squeeze could trigger a strong rise in the US dollar, which could have a negative impact on precious metals. This could result in some losses to gold (XAU/USD) and silver (XAG/USD) in the short term, but even if policy makers raise rates further, it will not necessarily lead to significant losses in this sector as the normalization cycle is almost over in the current environment.
Although unlikely, traders should consider a scenario in which Powell abandons his hawkish rhetoric and adopts a softer tone. If the FOMC chair remains uncommitted to further tightening and continues to signal a strong data-dependent approach going forward, markets may try to drive the ensuing easing cycle ahead, leading to US weakness. This will be a plus for both gold and silver.
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