Gold Analysis Ahead of The FOMC. How to trade gold at FOMC?

25 May 2022

The much awaited FOMC will be released in a few hours. Naturally, there happens a big movement in dollar related pairs during FOMC.

There are two parts to the FOMC statement
1. Hawkish
2. Dovish

In a nutshell, hawkish means positive economic activity or optimistic positive economic projections. Hawkish statement includes all positive economic outcomes, including positive economic growth, positive trade balance, positive upcoming economic projections, more job creation, bank rates and salary increases. And Dovish is the opposite of all hawks.

Now the thing is, not everything in a country is as positive, but not everything is negative. That's why we look at two or three important matters in each FOMC. If these two / three issues are positive then we do not accept the statement is hawkish, and if it is negative then we consider that the statement is dovish.

The key issues in today's FOMC statement are inflation, economic growth and bank rates. And the biggest issue is the bank rate.

If all three of these issues are positive then we will take the statement hawkish and we will buy dollars against other currencies. In that case we must sell gold.

Now we will check the previous data a little bit about upcoming FOMC statement, from the previous data it is understood that the economic growth i.e. the previous GDP report dropped and this week the GDP report has forecast negative. That means economic growth is negative. But the job market report was positive in that case, although the economic growth is negative, the United States has some advantages compared to other countries. In that case economic growth is not entirely hawkish, but better than others.

Inflation, on the other hand, is in a super high position. The last CPI report was positive. It is good to increase inflation to a certain level, but it is dangerous to increase it too much. American inflation is now in a somewhat dangerous state.

We will not call it positive at all. However, it could also be positive if Powell mentions in his statement that inflation has risen, in the future we will raise rates further to control inflation. Basically, central bank rise bank rates to control inflation. So we have to see how Powell treats this higher inflation. If there are hints of more rate hikes up front, then it makes sense. This will be considered as higher inflation positive and the statement is hawkish.

Now let's come to the most important issue, rate hints. Basically, almost everything depends on this issue today. If Powell says today that they want to increase the rate by 50 bp even after July, then the statement will be hawkish. But if there are no hints about the aftermath of July, the dollar may not benefit much. Because it has already said that it will increase the rate by 50 bp in July-July, and the dollar has already become quite strong in the market with the price in it.

So, we have to keep this in mind at the time of the statement, what Powell says about the upcoming bank rates.

Now if the FED says that we no longer need to raise rates, or hints to raise rates below 25 BP, then the dollar will be weak against gold, if nothing else. Although such a possibility is low, but not absolutely impossible.

The dollar has strengthened against almost all currencies around the world. If the dollar is so strong in the long run, it will be bad for America in the long run as a reserve currency. American trade will decline, exports will decline.

From my own experience, I had seen many times if the dollar is strong in the long run, the FED willfully give a dovish statement just to weaken the dollar. So as not to have a negative impact on the economy in the long run. And since the dollar has been strong for several months now, and there is no press conference in today's statement, the Fed may be willing to issue a dovish statement. I will not make any decision beforehand of the FOMC but after FOMC, we will open trades based on the statement.


Technical view

Immediate resistance from the current rate is $1870 And there is support at $ 1850/1845. Until FOMC, there is an opportunity that gold may test $1850/1845. If the statement is dovish then Gold is more likely to test $1870 area by bouncing from $1850/45. If the statement is too dovish, it can break $1870 and may test $1880 areas. However, in the current context, it is very difficult for Gold to go above 1880 area.


On the other hand, if the FOMC statement is hawkish and the gold is stable below the $1845 area, then our 1st target for sale is $1830 and the final target is $1812.