FOMC preview: Rate hike priced in as markets await policy guidance

The most anticipated event of the week—and possibly the month—is finally here. The Federal Reserve is set to announce its monetary policy decision later today, and the stakes are high going into the meeting.

Inflationary pressures remain elevated as energy prices continue to rise, with oil briefly trading above $106.50 per barrel before giving up some of those gains. The US Treasury market has also come under significant pressure, with the 10-year yield touching 5.00% and the 30-year yield trading around 5.37%, according to Bloomberg.

These developments have put the Federal Reserve in a difficult position, while the market has largely backed policymakers into a corner. A 25-basis-point rate hike is now widely expected, meaning the main point of contention will be the Fed’s forward guidance and whether Chair Kevin Warsh leaves the door open to further rate hikes.

The US Dollar may require more than today’s expected rate increase to hold on to its recent gains. Warsh and the Federal Reserve will need to deliver sufficiently hawkish guidance and signal that further tightening remains possible if inflationary pressures persist.

Anything short of that could lead the market to interpret the decision as a dovish hike. A less aggressive policy statement or press conference—particularly one suggesting that today’s increase may be a one-off move—could weaken the Dollar despite the rate hike itself.

Market positioning

Major currency pairs are mostly in wait-and-see mode ahead of the decision. EUR/USD is down 0.03% and trading close to support around 1.1530, while GBP/USD is down 0.05% and approaching support around 1.3460 following the release of the UK CPI report this morning. Annual inflation rose to 3.1% in August, broadly in line with market expectations.

The US Dollar Index is trading near significant resistance around 99.345 after struggling to close above the upper boundary of the channel around 99.220.

A sustained break above this area could open the door for a move towards 100.00—a level the index has not approached since July—and would likely strengthen the US Dollar across major currency pairs.

This makes the current resistance area crucial ahead of the Fed decision. A hawkish rate hike could provide the momentum required for the index to break above the channel and resistance. However, a dovish hike could push the index back into the channel and weaken the Dollar.

Gold position ahead of the Fed

Gold and silver are showing more decisive movement ahead of the announcement. Gold is up more than 0.80% in the session, trading around $4,329 after encountering resistance near $4,340. Silver is up more than 1%, trading around $64.39 after running into resistance near $65.00.

Gold’s move higher is notable because the US Dollar remains firm and Treasury yields are still elevated—conditions that would ordinarily create pressure on the metal. The advance may reflect defensive positioning against inflation, geopolitical uncertainty or the possibility of a less aggressive Fed message.

Price is currently trading near $4,330 and could still extend towards the upper boundary of the channel around $4,360. However, sellers will remain interested in further downside if the Federal Reserve delivers a hawkish rate hike and signals that additional tightening may follow.

On the other hand, a dovish hike could weaken the Dollar and Treasury yields, creating room for gold to break above the current channel. The Fed’s communication will therefore be just as important as the rate decision itself in determining the next directional move across the Dollar and precious metals.