Fed's September meeting minutes to play key role in dollar and gold direction

Highly anticipated minutes from the US Federal Reserve’s September meeting will be released Wednesday afternoon. This release takes on particular importance because of the three very conspicuous dissenting voters at the meeting (Rosengren, George, and Mester) who pushed unsuccessfully for a September interest rate hike. Typically displaying a more united front, the Fed’s newly divided monetary policy outlook has increased pressure on the Fed to raise rates and heightened expectations of a rate hike by the end of the year.

Adding onto these expectations have been a parade of Fed speakers, both voting and non-voting members, who have largely made hawkish comments in favor of raising rates sooner rather than later, even despite last week’s modestly weaker-than-expected US jobs report. The latest to speak was New York Fed President William Dudley, who remarked on Wednesday that the Fed’s delays in raising rates can be attributed more to “slack” in the labor market due to underemployment, and that inflation appears to be only slightly below target, unlike many European deflationary economies. These remarks undoubtedly place increasing emphasis on the next two US jobs reports preceding the all-important December Fed meeting.

Increasingly higher expectations for a December rate hike in recent days and weeks have helped to boost the US dollar sharply while weighing heavily on gold prices. Some of this impact has lately also been seen in the equity markets, as the S&P 500 benchmark has increased in volatility in the past few days, just recently breaking down below the consolidation that had been in place for the past month.

If Wednesday’s release of September’s Fed meeting minutes leans as much, or even more, to the hawkish side than is already suspected, market-viewed probabilities of a December rate hike, already lofty at above 70%, could rise even further. In this event, the dollar could get a further boost as the price of gold extends its fall and stock markets could enter a period of even higher volatility, especially when combined with the onset of earnings season and the volatility-inducing US presidential election just around the corner.

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