The Federal Reserve (Fed) is set to make crucial monetary policy announcements this Wednesday, amidst a backdrop of heightened trade uncertainties. Market participants anticipate that the Fed will refrain from providing substantial specifics on trade restrictions, as uncertainty remains high. The demand for the US Dollar has surged, prompting traders to adopt a cautious stance and steer clear of making directional bets.
Despite the anticipation surrounding the Fed meeting, there is virtually no chance of another rate reduction being implemented on Wednesday. The benchmark rate is projected to be lowered to 3.00%, following a modest 25-basis-point cut. Concurrently, the Bank of Canada (BoC) is expected to lower its policy rate for the sixth consecutive meeting on Wednesday, indicating a trend in monetary easing among major central banks.
Adding to the global economic landscape, Australia is poised to release new inflation-related data on Wednesday, with expectations pointing towards eased price pressures. The Reserve Bank of Australia (RBA) is anticipated to cut interest rates in February, aligning with global efforts to manage inflationary challenges.
Some members of the Federal Open Market Committee (FOMC) have expressed concerns that increased trade restrictions could impede the disinflation process. Fed Chair Jerome Powell's remarks on trade restrictions are likely to be interpreted as dovish signals. Powell may caution that heightened protectionism poses a risk of sustaining higher inflation levels for an extended period and potentially weakening US economic growth.
The labor market remains robust, nearing full employment, while inflation continues its trajectory towards the Fed's 2% target. Investors are keenly awaiting the Fed's monetary policy decisions, which adds to the difficulty for XAU/USD in gaining directional momentum. Futures markets are not entirely pricing in the next Fed rate cut until the June meeting, though there remains a reasonable chance for it as early as May.
In the currency markets, EUR/USD has lost traction and is trading in negative territory near 1.0400 as of Wednesday. Meanwhile, gold struggles to build on Tuesday's gains and is trading in the red below $2,760 on Wednesday.