Fed Meeting, Oil, Gold

• Fed

• Oil

• Gold

All eyes on the Fed

Safe to say, it's been a slow start to the trading week, not altogether too surprising given what we have to come.

It is often the case that when we have a big central bank meeting, traders can take a more cautious approach and it seems that this week is shaping up to be no different. Given that expectations for a rate cut are so low - around 20% at the time of writing - and so high in July - 81% - you'd be forgiven for wondering why we're seeing such caution but the reason is quite straightforward.

There remains a huge element of uncertainty about how and when the Fed will cut interest rates because of the meeting between Trump and Xi at the G20 meeting next week. The trade war between the world's two largest economies has created enormous uncertainty for both economies and weighed on the outlook, forcing the Fed to pause the tightening cycle and consider easing conditions instead. Should Trump and Xi overcome the impasse next week, it's likely that interest rate expectations will change and the Fed may hold off a little longer. With that in mind, it would make little sense to cut rates this week.

But that doesn't make the meeting straight forward because while rate cut expectations may be low, the meeting presents the ideal opportunity for policy makers to lay the groundwork for the rest of the year and market-based expectations are very aggressive - more than 50% chance of 75 basis point of cuts by the end of December. The central bank will release new economic forecasts alongside the dot plot so their intentions will be made very clear and equity markets have only been sustained recently by the expectation of at least two rate cuts. If the Fed lowers expectations ahead of the G20, equity markets could be in for a shock.

Oil steady after last week's spike

The escalation in the Gulf of Oman last week understandably sent oil prices higher, with WTI up around 4% at one point. Since then though, it's been slowly paring gains in the absence of any further escalation. This probably tells us a lot about how traders are viewing oil markets at the moment, ahead of the Trump, Xi meeting next week given that the cloudy global economic outlook is a major factor weighing on them.

For one, this is clearly viewed as only a minor escalation at this moment. If this was viewed any more significantly, given that 20% of oil passes through the Strait of Hormuz each day, prices would not have stabilized so quickly and after such a relatively small spike. It also suggests that the market remains bearish ahead of the G20, driven by lower demand expectations and record US output. Even the prospect of an OPEC+ output cut extension next month and rapidly declining Iranian output don't seem to be lifting prices, against the backdrop of these other issues.

Gold off its highs as dollar strengthens

Gold is trading lower again on Monday after coming aggressively off its highs on Friday as the dollar ended the week on a strong note. The yellow metal peaked around $1,360 before profit taking kicked in, which is understandable given that this once again comes around multi-year resistance. It's going to take a big push to break these levels but if it does, it could be a very bullish catalyst.

We may instead see a bit of a correction in gold, with $1,320 being notable support to the downside. A break below here may indicate a sharper correction is on the cards after such a strong run to the upside.