Gold set to turn volatile as Fed decision looms

Whatever the outcome of today’s FOMC meeting and press conference, we should see a knee-jerk reaction in gold and other markets at the very least. That’s because some people will undoubtedly be proven wrong, given, for example, that the probability of a small rate increase is still about 30 per cent, according to the Fed Funds Futures. The big surprise therefore would in fact be a rate rise, which could send the dollar rocketing higher and buck-denominated gold tumbling. However the more likely outcome is probably going to be a hawkish message without a rate increase. In this scenario, the dollar may at least initially extend its decline before possibly bouncing back at some later point. If this view is correct, gold could initially rally.

If the Fed’s actions, or lack thereof, cause the dollar to fall, buck-denominated gold is likely to respond positively, at least initially anyway. Ahead of the FOMC statement and press conference, due in a couple of hours’ time, the precious metal is consolidating just below the key $1125 resistance level and 38.2% Fibonacci retracement of the most recent drop from $1170. If this $1125 level gives way, the most likely outcome for gold would be a sharp rally to around $1143/5 area before it decides on its next move. This level marks the convergence of the 61.8% Fibonacci retracement with a bearish trend line that has been in place since January. From here, it is likely that gold would fall back to $1125 initially and possibly lower over time. However if $1143/5 fails to hold as resistance then we could see the onset of a much sharper rally, at least towards $1170.

Meanwhile on the downside, traders will need to keep a close eye on short-term bullish trend line which comes in around key support at $1100. If this level breaks down then price may at least revisit the low from July at $1077 before potentially falling towards the Fibonacci extension levels shown on the charts.

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