XAU/USD maintains its descent in European trade as renewed Fed rate hike bets and dollar strength return. Any hopes of an early pivot by the US Federal Reserve were dealt a blow last week as US GDP and core inflation numbers both injected a fresh bout of rate hike optimism helping the DXY pare some early week losses.
The outlook moving forward remains uncertain as this week’s meeting approaches. This comes as a host of Federal Reserve policymakers have, in recent weeks, tempered their language regarding rate hikes beyond Thursday’s meeting.
Based on the change in rhetoric, markets seem to be pricing in a less aggressive Fed at this week’s meeting, at least regarding the forward guidance provided. Interest rates are still expected to increase around the 5-5.25% mark in early 2023.
However, this probability has reduced over the past week even with the positive GDP and core inflation numbers supporting further hikes. All of the above may suggest that the ‘pivot’ from the Fed may not be far off, making this week’s meeting all the more important.
Given a slightly dovish stance expected by the Federal Reserve, the only way to avoid a potential 5th rate hike of 75bp in December depends on a slowdown in inflation numbers. Currently, this seems like a pipe dream. It will remain important to gauge the comments by the Federal Reserve on Thursday, as the possibility of a 50 or 25bp hike in December continue to grow.