Stock markets are edging cautiously higher on Wednesday, as investors await the outcome of the Federal Reserve monetary policy meeting.

Fed Chairman Jerome Powell used his virtual Jackson Hole platform last month to announce changes to the central bank's monetary policy framework, targeting average inflation of 2%; in effect allowing for inflation overshoot after a period of falling short. Given the length of time that inflation has done just that, investors were buoyed by the prospect of an even more prolonged period of zero interest rates and perhaps even more stimulus.

While we're not anticipating more easing today, there is an expectation that the Fed will provide further colour on the changes announced last month. What exactly does this mean for monetary policy? Can we expect more asset purchases? Negative interest rates? Yield curve control? At what stage should we factor in rate increases?

I'm not naive enough to expect answers to all of these questions today but the Fed will need to display a dovish shift from the last meeting, reflecting the commitment to the new framework. And more detail may be demanded regarding what the change means in reality. I wonder whether the Fed is positioned to disappoint.

Inflationary pressures have risen more than expected in recent months and the economy is bouncing back better than expected, as evidenced by the OECD's new economic projections. The US is now expected to contract by 3.8% this year, an improvement on the -7.3% projection in June. Against this backdrop, I can't imagine the Fed will be keen to make overly bold promises.

Gold and USD looking exhausted ahead of Fed

It will be interesting to see how the dollar and gold respond to the Fed later today. Gold has really struggled to break back above $2,000 after collapsing back through here in spectacular fashion just over a month ago. Moreover, the dollar has been under pressure since March and has recent shown signs of pushing for a correction. With both of these trades showing signs of fatigue, a failure by the Fed to meet or surpass expectations could get quite a reaction.

Equally, should Powell's soothing tones successfully reassure investors that they won't be faced with rate hikes any time soon and could even be treated to further easing, it could spell doom for the dollar recovery trade before it's had chance to get going. The picture will look a whole lot clearer tomorrow but if gold can't break $2,000 again today, we may be waiting a while and the path of least resistance may lie below.

Oil bounceback temporary

Oil is enjoying another bumper session on Wednesday, rising as Hurricane Sally heads for the Gulf Coast, forcing more outages. The API also reported a huge 9.5 million barrel inventory drawdown on Tuesday, far surpassing expectations ahead of today's EIA report, which is forecasted to drop by just 1.27 million barrels. I'm sure expectations will have since been modified though.

Both of these factors seem temporary though and have maybe just triggered a corrective rally in oil prices, after they fell heavily this month. WTI still faces significant resistance around $39, with Brent seeing a similar challenge around $42. The outlook remains challenging though, as evidenced by the recent projections from IEA and OPEC.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities.

Opinions are the authors — not necessarily OANDA’s, its officers or directors. OANDA’s Terms of Use and Privacy Policy apply. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

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