The Fed made it clear last night that they are perfectly okay with higher rates because the main target for them is inflation. In the Minutes, the impression that most traders got is that inflation is the main denominator for the Fed and nothing else matters now. It is pretty clear now that the Fed will increase the interest rate by 75 basis points during their next meeting and the Fed will not change the path of its monetary policy until the problem on hand is resolved or at least begins to show signs of cooling off.
As for the market reaction, traders are actually of mixed minds. Some still believe that the Fed will slow down the pace of interest hikes as the poorest in the economy are getting hit significantly, with the mortgage rate across most of America sitting above 7%. Having said that, the mandate is clear from the Fed side, and that is bring stability to the system.
One important thing that traders need to keep in mind is that this particular meeting happened ahead of the US CPI numbers. This means that the Fed didn’t get to see a fresh reading of the US CPI number. The data is due today, and it is likely to bring significant volatility for markets. It is anticipated that inflation pressure could remain elevated; however, we may not see the same sort of pace that we experienced earlier this year. A lot of this is because of two reasons. Firstly, oil prices have come down from their peak levels, and despite the fact that OPEC announced a massive oil production cut, prices are still very much sliding after their initial rally, which is positive for inflation. Secondly, the Fed’s hawkish monetary policy has slowed the pace of economic growth in the US.
But a question that is bigger than anything and matters the most for traders and investors is how long it will take for inflation to return to its normal level. The Fed’s current monetary policy doesn’t seem to be positioned appropriately to tackle that issue. After today’s inflation data, the main focus among traders will be on this question.
Gold
Gold prices are trading somewhat steadily today but still under the influence of the strong dollar, which is stopping the precious metal from scoring any serious gains. The main event for gold traders is now the US CPI numbers which will be released at 12:30 GMT. The data is very much going to give us two important answers. Firstly, it will tell us some clues about the size of the interest rate by the Fed. Secondly, it will also give us a clue about the potential interest rate for the meeting after the current one.
If the US inflation numbers come out strong, we are highly likely to see another interest rate hike of 75 basis points from the Fed, and that may be the pace going forward as well. This scenario could push the gold prices towards 1650 or even lower. However, if inflation numbers show modest strength, then we could actually see speculations of a 50-basis point interest rate—a highly unlikely scenario but certainly a possibility. This could easily push the price of gold higher, and we may see the precious metal moving above the resistance level of 1,700
Oil
Oil prices continue to struggle to gain strength as traders are largely concerned about the worsening demand outlook. One of the major questions among traders is how far OPEC can push the curve. This is because oil prices are giving up their gains which they scored on the back of OPEC’s production cut announcement. Now, oil prices are slipping, and it seems highly likely that the path of the least resistance is skewed to the downside. What matter the most for oil traders now is a revival of oil demand, and if this doesn’t pick strength, oil prices are likely to continue to move lower.