At 2:00 a.m. Beijing time on Thursday, the Federal Reserve will announce the interest rate decision. The market expects the Federal Open Market Committee (FOMC) of the Federal Reserve to keep interest rates in the range of 5.25% to 5.5%. This is because strong US economic data shows that inflation is still sticky, and the slowdown in GDP growth in the first quarter may cause the Federal Reserve to remain cautious.

Despite this, recent minutes of meetings show that almost all Federal Reserve officials think it is appropriate to relax monetary policy at some point this year. Therefore, traders will be watching Powell's views on the recent upward trend in inflation data and whether Powell made a “pigeon voice” at the press conference at 2:30 a.m. on Thursday at 2:30 a.m. Beijing time when the hawkish consensus dominates.

After the US PCE report was released in March, traders priced the Fed's interest rate cut before the end of this year at about 36 basis points, or about 1.5 interest rate cuts. This is a sharp decrease compared to expectations of nearly 7 interest rate cuts at the beginning of the year.

The pace of downsizing

Given that interest rates are likely to remain unchanged, and Powell is likely to continue to warn that the path back to the inflation target will be bumpy, keeping the Fed cautious, traders will pay close attention to potential changes in the Fed's slowdown.

The minutes of the recent meeting show that the vast majority of Federal Reserve officials believe that it is prudent to start slowing down the pace of contraction as soon as possible, and only a few officials prefer to maintain the current pace of contraction until the data shows that reserves are close to a “sufficient level.”

Federal Reserve officials are generally inclined to roughly halve the monthly rate of contraction. Judging from the recent overall rate, this means that the maximum contraction limit for US Treasury bonds may be lowered from 60 billion US dollars to 30 billion US dollars per month. With regard to mortgage-backed securities (MBS), officials saw no need to slow down its contraction, but instead preferred to adjust the upper limit of US Treasury redemptions.

FOMC statement may make hawkish adjustments

Morgan Stanley wrote in a preview of the FOMC statement that it does not expect much change in the FOMC statement. Federal Reserve officials may adjust the first paragraph of their policy statement to acknowledge that inflation progress has stalled in the first three months of this year. The previous inflation data exceeded expectations for the third month in a row, which disappointed the US Federal Reserve officials who wanted to cut interest rates.

Powell made it clear that progress in inflation has stalled. Therefore, the “current conditions” paragraph might be worded in a more hawkish way, clearly acknowledging the lack of progress over the past few months.

Ellen Zentner (Ellen Zentner), chief US economist at Morgan Stanley (Morgan Stanley), said: “Compared with the same period last year, inflation has improved a lot, but progress in slowing inflation in recent months has almost come to a standstill.” This lack of progress weakened Powell's determination to cut interest rates in June, which is why Morgan Stanley and many other banks postponed their first rate cuts until July, and expect a total of three interest rate cuts this year (July, November, and December).

However, Zentner does not expect officials to change the guidelines in the statement, which will still hint at interest rate cuts. Morgan Stanley is convinced that inflation will move towards its target, as last week's new rent data provided strong support. As a leading indicator of inflation, rent growth has once again slowed, which indicates a further slowdown in future inflation.

Press conference

Morgan Stanley estimates that Powell will emphasize reasons for austerity to continue to work. He just attended the International Monetary Fund-World Bank Spring Meeting and explained his latest monetary policy views, so the message he conveyed at this meeting is unlikely to deviate much from his previous views.

During the spring meeting, Powell pointed out that recent data did not strengthen the Fed's confidence in slowing US inflation; on the contrary, it suggested that it might take longer to achieve this confidence. However, he also said that regardless of the situation, the Federal Reserve's policy is ready to deal with it: if high inflation continues, the Federal Reserve is capable of maintaining the current level of austerity; and if the labor market weakens unexpectedly, the Federal Reserve is also capable of taking easing measures.

As more inflation data for the first quarter came out, the turbulence in the inflation path and higher-than-expected data prompted policymakers to continue to emphasize patience. Powell said in his April 16 speech that the inflation data from January to March did not provide evidence to convince the Federal Reserve that the slowdown in inflation is still progressing. As a result, policymakers are increasingly inclined to allow austerity policies to last longer in order to fully mitigate inflationary pressure.

Goldman Sachs's Dominic Wilson summed it up succinctly: “Three consecutive inflation figures that have exceeded expectations are hard to ignore. At least policymakers need to see more positive data to regain confidence in the path of inflation.”

Although the current inflation trend has not changed, Goldman Sachs believes that the potential outcome of a possible reversal of the inflation trend is exactly what Powell is focusing on. Therefore, Powell will use this Wednesday's press conference to clearly convey the signal that “interest rates will rise for a longer period of time.”

Powell may also be asked about proposals that Trump's team is quietly drafting, which would limit the independence of the Federal Reserve if Trump wins re-election. The chairman of the Federal Reserve may emphasize the importance of the independence of the Federal Reserve and restate that political factors will not influence the Fed's decisions, while refraining from commenting on any candidate.

Gold bulls losing momentum?

Fxstreet analyst Slobodan Drvenica said that US policymakers may delay the first rate cut until the fourth quarter of this year, or even to the beginning of 2025, which will reduce the appeal of gold and increase the risk of further pullbacks. Drvenica said the overall situation remains bullish as long-term geopolitical instability and increased demand for gold from central banks will continue to boost demand for gold.

The daily gold chart is weak, and the monthly candlestick has a long upward line, which warns investors that bulls are losing momentum.

After gold continues to fall below the $2,300 area, a larger correction is expected. The next support level is $2,260 (38.2% Fibonacci retracement level of $1984 and $2431). Ideally, this support level will contain the rise in gold prices until gold accelerates towards the $2,500 target. This will be a healthy correction. If the price of gold falls below the 2,260 level, it may lead to a deeper decline and will face the key pivot point in the 2200 region (where the 50% retracement level intersects with the 55-day moving average), increasing the risk of a downward trend in gold prices.

Analyst Haresh Menghani said that the price of gold has tried to attack the resistance of the 200-hour simple moving average (SMA) in the past few days. Currently, this resistance is around 2,346, which coincides with the 38.2% Fibonacci retracement level of the recent pullback from an all-time high. It is expected that this will act as a key turning point. The next resistance is in the $2352-2353 area. If successfully broken through, the price of gold is expected to rise further to the next relevant resistance level, the 2371-2372 area. Since then, the momentum of the gold price may extend further, moving towards the $2,400 integer mark, and eventually reaching near the all-time high level reached earlier this month, that is, the 2431-2432 area.

Editor/Somer