Markets Brace for First Warsh FOMC Meeting

The Fed is expected to keep rates unchanged, but traders will be watching for changes in style and tone from the new Chair as they try to figure out what reopening the Strait of Hormuz means for the monetary policy outlook.

The Key Points to Drive the Markets

• Markets expect a hold and are lowering the odds of a rate hike this year as tensions in the Middle East ease.
• Focus on the new communication style of Fed Chair Kevin Warsh, who is expected to prioritise real-time data over projections.
• Markets are expecting the FOMC statement to shift towards a neutral bias from a dovish one after the rise in inflation and the improving jobs market.

Will Kevin Warsh Axe the Dot Plot?

Markets are near-unanimous in expecting the FOMC to keep rates unchanged at the end of its two-day meeting on Wednesday. But more importantly, it is where markets expect rates to go next. This will be the first meeting chaired by Kevin Warsh, and traders are keen to know what changes he will introduce to the Fed. He is widely rumoured to be a dove, having been appointed by US President Donald Trump after an extensive push to get Jerome Powell to lower rates amid rising inflation. However, so far, Warsh has avoided giving explicit indications of his preferences, leaving uncertainty about what the Fed could signal about the future of rates or how much dissent there will be. Traditionally, the Fed makes unanimous decisions, and the final meetings of Powell's tenure were notable for the large number of dissenters, most of whom called for a rate hike.

One of the key points is likely to be the language in the FOMC statement, which is what generated the dissents last time. The expectation is that the committee will modify the language of the statement to signal a neutral bias rather than the cutting tone of the last meeting. The minutes of the last meeting showed that many members objected to keeping that language and were open to raising rates if the war with Iran continued to keep interest rates elevated. But with a deal to open the Strait of Hormuz in the works and crude prices falling, the odds of the Fed "looking through" energy inflation have increased. Clarity on the FOMC's biases can be found in the dot-plot matrix, which is scheduled to be updated after this meeting. The last time the dot plot was published, before the war began, it showed one rate cut for this year. But the new Fed Chair has been highly critical of this kind of forward guidance, and there are rumours he will de-emphasise the dot plot or potentially do away with it.

What's Needed to Boost Gold Prices

The yellow metal has been upbeat since the deal to end hostilities in the Middle East, but is facing headwinds amid uncertainty ahead of the Fed meeting on Wednesday. The market doesn't know yet what a Warsh-led Fed will look like. The new Chair is known to favour less detailed, less frequent forward guidance and to concentrate more on data. Contrary to the impression of a Trump appointee, he's had harsh language about inflation and the Fed's role in supporting price stability while largely ignoring the jobs market. Traders will be on the lookout for hawkish surprises that could slow the rise in gold prices. Meanwhile, more dovish signals, such as concerns about the state of the economy, might weigh on the dollar and, at least temporarily, support gold.

Gold in Potential Double Bottom Formation

The yellow metal is facing strong resistance at the middle VWAP of 4390, which has already rejected bulls a couple of times since May, resulting in what appears to be a potential double bottom with a false breakdown near $4100. If the resistance level holds firm, losing the lower VWAP at $4115 would expose the $4k handle, followed by the support at $3880. On the flip side, if bulls reclaim the VWAP and $4500 swing, gold could accelerate towards the upper VWAP at $4660. Above there, the next resistance lies near $4780, with the neckline of the potential double bottom formation at $4890.

Source: SpreadEx | Gold,  Daily Chart