Fed decision in focus, UK inflation weighs on GBP/USD, Gold prices range bound

Fed rate decision, UK inflation, Gold Talking Points

• Can the Fed make or break the USD? FOMC economic projections in the spotlight.
• GBP/USD falls into oversold territory on UK CPI miss
• Oil shrugs off renewed analyst forecasts of $100 for Brent crude, prices currently down 1%, gold prices remains range bound.

FOMC economic projections and Fed rate decision - tonight 18:00 UTC

The Federal Reserve is gearing up for the highly anticipated September Federal Open Market Committee (FOMC) meeting, where Fed Chair Jerome Powell will provide guidance on interest rates for the United States. When interest rates rise, the cost of financing debt increases (for homeowners and businesses), reducing the amount of money available for consumers to spend.

Can the Fed drive gold out of its narrow range?

For gold prices and US stock indices, tonight’s agenda could drive volatility for the non-yielding assets that don’t generate interest, driving prices out of their current range. As XAU/USD remains cautious ahead of the 18:00 UTC meeting, the 200 - day MA average continues to provide a critical layer of support at a level of $1,923.77, while a break of $1,930 could bring the next big level of psychological resistance into play at $1,940.

Spot gold (XAUUSD) daily chart

Chart prepared using TradingView

Understanding the importance of the Federal Reserve and the fight against inflation

With inflation remaining above the Fed’s target level of 2%, rates have increased by 5.25% since November 2021 (from 0.25% to 5.5%), increasing the possibility of a recession.

Although analysts expect the central bank to pause its rate hiking cycle in today’s meeting, policymakers have remained focused on achieving the objective inflation target (which is roughly 1.7% lower than current levels), meaning that rates may need to stay higher for longer in order for price pressures to ease.

This makes the FOMC economics projections a vital part of tonight’s agenda, where Fed Powell could provide further insight into the dot plot (this is the short and long-term projections for interest rates which impacts the return received for investing in US banks and the bond market).

GBP/USD temporarily slumps on UK CPI miss - what does it mean for the BoE?

While the FOMC remains at the forefront of today’s major risk events, the UK inflation print, released earlier today (06:00 UTC), highlighted a slowdown in inflation, raising questions on whether or not the Bank of England (BoE) will pause or go ahead with the 25 basis point rate hike scheduled for tomorrow (11 am UTC).

A summary of the UK inflation report includes:

• Core inflation YoY fell from 6.9% in July to 6.2% last month
• Year-on-year inflation in August dropped to 6.7%, down from 6.8% last year
• Month-on-month inflation came in at 0.3%, below analyst forecasts of 0.7%

In response to the indecision regarding the upcoming BoE hike, GBP/USD temporarily slumped to a daily low just above 1.2333 before rebounding slightly to the current level of 1.236, pushing the relative strength index (RSI) below the 30 handle, suggestive that the currency pair may be oversold.

GBP/USD daily chart

Chart prepared on TradingView

As fundamental and technical factors are likely to continue to contribute to momentum for the short-term outlook, the 1.230 level is currently providing support at 1.230, with psychological resistance holding at 1.240.