Gold attempts to recover losses before Fed decision, following sharp declines linked to Trump's election victory
Market turmoil continues in the wake of the US presidential election, which has brought significant volatility. Trump's victory appears to have made the Fed's task even more challenging, although today's decision is unlikely to surprise. Nevertheless, a stronger shift in Fed communication compared to September's meeting could signal a reaction to the election results, even as the market had already indicated the need for fewer rate cuts. How might today's Fed decision impact key markets, and will the Fed signal a more cautious approach to future rate cuts?
Rate cut is certain. What's next?
Today's rate cut is priced in with a 99.8% probability, according to US interest rate futures contracts. A December move is priced at 73.6%. Last month, the market briefly priced equal chances for a cut or hold in December. Trump's election hasn't significantly altered expectations for the current year but has slightly reduced expectations for cuts next year. However, during the September meeting, cuts of 200 basis points were expected by September next year. Currently, less than 100 basis points are priced in.
Start investing today or test a free demo
Create account Try a demo Download mobile app Download mobile app
Source: Bloomberg Finance LP, XTB
Strong Q3 economic growth suggested the Fed wouldn't be forced into aggressive cuts. Conversely, the dismal October NFP report showed growth of just 12,000. Although the US labor statistics bureau indicates the data is somewhat distorted by hurricanes, some Fed members, likely including Powell, will be more concerned about the labor market, potentially maintaining the need for further cuts, at least for now.
On the other hand, some members wanted only a 25 basis point cut in September. Now, with the potential for higher inflation expectations, some members may want to pause cuts in December or early next year.
December forecasts are crucial
While a December cut is currently highly probable, much could change looking at economic forecasts for next year. The Fed will need to consider Trump's economic agenda and tariffs on foreign products. According to Janet Yellen, a 1% GDP deficit increase over 10 years raises the neutral interest rate by 30-40 basis points. Theoretically, this could mean more members seeing a higher neutral rate in December. Currently, Fed members' expectations are widely dispersed. It's worth remembering that all this influences long-term market yields, potentially limiting economic growth potential. However, these are considerations for December/January, while now Powell will likely convince his Fed colleagues that rate cuts are necessary to support the labor market situation.
US interest rates and yields. Source: Bloomberg Finance LP, XTB
How will the market react?
Today's market picture is largely shaped by yesterday's US presidential election results and today's rebound. However, reactions can be expected at 20:00 and after 20:30 during Powell's press conference. If Powell maintains previous communication and continues to indicate the need for cuts due to weakening labor market conditions, a dollar decline, gold rebound, and further stock market support are possible. Conversely, if Powell starts discussing Trump's policy impact on inflation expectations and yields, it may signal the Fed is considering future fiscal policy now. This could further limit expected rate cuts, which is good for the dollar, negative for gold in the short term, and negative for stock indices. However, it's worth remembering that further US deficit increase is very positive for gold in the long term.
Recently, a rate of 3.0% was priced in for June, now it's almost 4%. Source: Bloomberg Finance LP, XTB
Gold is limiting yesterday's declines, rebounding today from the 50-period average. If the Fed doesn't change its communication, a rebound to around 2700 USD is possible today, where the 25-period average is located. On the other hand, speculation about inflationary revival next year from the Fed could bring gold back to around 2650 USD per ounce. Source: xStation5
The content of this report has been created by XTB S.A., with its registered office in Warsaw, at Prosta 67, 00-838 Warsaw, Poland, (KRS number 0000217580) and supervised by Polish Supervision Authority ( No. DDM-M-4021-57-1/2005). This material is a marketing communication within the meaning of Art. 24 (3) of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (MiFID II). Marketing communication is not an investment recommendation or information recommending or suggesting an investment strategy within the meaning of Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC and Commission Delegated Regulation (EU) 2016/958 of 9 March 2016 supplementing Regulation (EU) No 596/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the technical arrangements for objective presentation of investment recommendations or other information recommending or suggesting an investment strategy and for disclosure of particular interests or indications of conflicts of interest or any other advice, including in the area of investment advisory, within the meaning of the Trading in Financial Instruments Act of 29 July 2005 (i.e. Journal of Laws 2019, item 875, as amended). The marketing communication is prepared with the highest diligence, objectivity, presents the facts known to the author on the date of preparation and is devoid of any evaluation elements. The marketing communication is prepared without considering the client’s needs, his individual financial situation and does not present any investment strategy in any way. The marketing communication does not constitute an offer of sale, offering, subscription, invitation to purchase, advertisement or promotion of any financial instruments. XTB S.A. is not liable for any client’s actions or omissions, in particular for the acquisition or disposal of financial instruments, undertaken on the basis of the information contained in this marketing communication. In the event that the marketing communication contains any information about any results regarding the financial instruments indicated therein, these do not constitute any guarantee or forecast regarding the future results.
