This week’s Fed meeting takes centre stage for financial markets, particularly given that much of the current pricing for assets has been predicated on a rate cut being forthcoming this week. And while a quarter-point interest rate cut does seem the likely outcome, given the relatively tame inflation readings (such as Core PCE released last Friday), any joy from traders could be short-lived should the US central bank sound less enthusiastic about the prospect of further monetary easing.
This is where the Fed’s ‘Dot Plots’ regarding the path of interest rates in 2026 will be key. As there could be quite a divide between the ‘hawks’ and ‘doves’ on the Fed board in relation to where the terminal interest rate level will be by the end of next year. The levels of dissent by Fed members could be a key theme of this December meeting.
There is also scope for the Fed’s message to leave traders of risk assets disappointed, should a rate cut this week be accompanied by a hawkish tilt from the Fed Chairman. There is a scenario where hawkish members of the Fed board could cite September’s NFP outperformance (119k vs 50k expected) or the jobless claims data released last week which was at a 3-year low as evidence that a ‘wait and see’ approach is required on rates heading into 2026. Let’s see what tone is taken by the Fed this week, as it could well shape whether the market adopts a risk-on or risk-off approach in the near term.
In FX, currency moves are relatively contained ahead of not only the Fed meeting, but a raft of other central bank meetings over coming weeks, including from the RBA, SNB, ECB, BOE and BOJ. The Dollar Index (DXY) is not venturing too far from the 99 level ahead of the Fed meeting, with expectations of a rate cut this week being offset by gains in US treasury yields.
The push higher by the 10-year US treasury yield is one reason gold has slipped back below the $4200 level. The spot price currently trades around the $4190 level, ahead of support at $4160 and $4030. While on the topside, resistance at $4270 and $4300 stands in between gold and a potential return to its all-time highs on the approach to $4400 (the high currently stands at $4381).
US crude oil continues to operate in the $58 to $60 range with peace talks regarding the Russia Ukraine conflict still ongoing but yet to reach an outcome. Essentially, if the talks break down, we expect oil to move higher, or if progress is made, and there is a likelihood of Russian supply to the global energy market resuming, prices would be expected to drop. So, oil is keeping to a tight trading range until we get a better idea of which way the peace talks will go.
But for now, the wait is on for the Fed meeting and the Jerome Powell press conference (Wednesday US time or Early Thursday morning for many Asian markets). Stocks, commodities, and currencies are all waiting to take their cues from the Fed meeting and the central bank’s willingness or otherwise to cut rates not only at this meeting but for 2026 also.
