US Dollar rallies before FOMC

The US Dollar is on the rise, reflected in the 0.20% gain seen in the US Dollar Index on the day, which tracks the world’s reserve currency against a basket of counterparts. Since Gold is priced in US Dollars, it tends to have an inverse relationship – when the Dollar strengthens it takes less of them to buy the same quantity of Gold, all other things being equal. 

The next big event for both Gold and the US Dollar is the FOMC meeting on Wednesday, March 22 at 18:00 GMT, at which the US Federal Reserve will make its next monetary policy decision. The odds currently favor a more-modest-than-was-previously-expected 0.25% increase in interest rates. 

If the Fed decides to go big with a 0.50% rate hike, however, it will boost the Dollar and push down Gold price – no cut at all will have the opposite effect.

Making the decision a little more complicated this time, however, is the recent banking crisis which was triggered in part by rising interest rates. Whilst the Fed wants to battle inflation, it must now also take into consideration the impact of higher interest rates on financial stability.

Another factor to consider is what the board of governors expects the terminal rate to be, which is reflected in the dot plot, within its Summary of Economic Projections. As Eren Sengezer, European Session Lead Analyst at FXStreet, points out in his Fed meeting preview, a modest hike accompanied by signs rates might be peaking soon could still be interpreted as dovish. 

“In case the Fed raises the policy rate by 25 basis points but the dot plot shows at least one rate cut before the end of the year, that could also be assessed as a dovish shift in the policy outlook,” says Sengezer.