????Gold rises 0.85% before the Fed

Gold is trying to recover its losses before the Fed’s decision, after the sharp declines linked to Trump’s electoral victory.

Market turbulence continues in the wake of the US presidential election, which has increased volatility. Trump’s victory appears to complicate the Fed’s task, although today’s decision is unlikely to hold any surprises. However, a marked shift in Fed communication from the September meeting could indicate a reaction to the election results, even though the market had already expressed the need to slow rate cuts. What impact could the Fed’s decision have on major markets? Will the Fed take a more cautious approach to future rate cuts?

The drop in rates is certain. What will be the next step?

According to US interest rate futures, the probability of a cut today is estimated at 99.8%, and a reduction in December is anticipated at 73.6%. Last month, the market was considering an equal chance of a rate cut or hold in December. The election of Donald Trump did not significantly change forecasts for this year, but it slightly reduced forecasts for next year. At the September meeting, a cumulative cut of 200 basis points by September next year was expected. Currently, less than 100 basis points are projected.

Source: Bloomberg Finance LP, XTB

Strong economic growth in the third quarter suggested that the Fed would not be forced into aggressive rate cuts. Conversely, October’s disappointing NFP report showed growth of just 12,000 jobs. Although the U.S. Bureau of Labor Statistics says this data is somewhat distorted by hurricanes, some Fed members, likely Powell included, will be more concerned about the jobs market, which could justify continuing the cuts rate, at least for the moment.

On the other hand, some members wanted a reduction of only 25 basis points in September. Now, with the possibility of higher inflation forecasts, some of them may consider suspending cuts in December or early next year.

December forecasts are crucial

The likelihood of a rate cut in December is currently high, but economic forecasts for next year could change this outlook. The Federal Reserve will have to take into account Trump’s economic agenda, including tariffs on foreign products. According to Janet Yellen, an increase in the deficit of 1% of GDP over ten years raises the neutral interest rate by 30 to 40 basis points. Theoretically, this could lead more Fed members to consider a higher neutral rate in December. Currently, the expectations of Fed members are widely dispersed. It is important to note that these factors influence long-term market returns, potentially limiting economic growth potential. However, these considerations relate to the months of December and January. For now, Powell will likely seek to convince his Fed colleagues that rate cuts are necessary to support the labor market.

Interest rates and yields in the United States. Source : Bloomberg Finance LP, XTB

How will the market react?

The results of yesterday’s US presidential election and today’s rally are strongly influencing the current market. Reactions are expected at 8:00 p.m. and after 8:30 p.m. during Jerome Powell’s press conference. If Powell maintains his earlier communication emphasizing the need for rate cuts due to the weakening labor market, the dollar could decline, gold rebound and stock markets receive additional support. Conversely, if Powell addresses the impact of Trump’s policies on inflation expectations and yields, it could indicate that the Fed is now considering future fiscal policy. This could limit planned rate cuts, which would be favorable for the dollar, unfavorable for gold in the short term and negative for stock indices. It is important to note that a further increase in the US deficit is very positive for gold in the long term.

Recently, a rate of 3.0% was forecast for June, while it is now almost 4%. Source : Bloomberg Finance LP, XTB

Gold limits yesterday’s losses and rebounds today from the 50-period average. If the Fed maintains its current communication, a rebound towards 2,700 USD is possible today, the level where the average is located over 25 periods. On the other hand, speculation from the Fed about an inflationary recovery next year could bring gold back to around USD 2,650 per ounce. Source: xStation5