Market update: Fed preview - Powell signals hawkish stance, affects gold, S&P 500

The Federal Reserve is poised to unveil its monetary policy decision from the April 30-May 1 gathering on Wednesday, with expectations indicating that the FOMC will maintain borrowing costs within the current range of 5.25% to 5.50%; and leave forward guidance unchanged in the statement. Without expected surprises, focus shifts to Fed Chair Powell's press conference for policy insights, especially with no new economic projections at this meeting.

Considering recent economic developments, including faltering progress on disinflation, coupled with tight labour markets, Powell is likely to embrace a more aggressive position. He may convey that policymakers are far from confident enough to commence scaling back policy restraint and advocate for patience in the interim. For context, inflation has surprised to the upside and trended higher in recent months, with core PCE running at 4.4% annualized over the past three months.

Reassessing the rate path: hawkish shifts and market implications

A shift towards hawkish rhetoric may suggest that the 75 basis points of easing projected for 2024 in the central bank's last dot-plot is no longer valid. This could lead to a delay in commencing the rate-cutting cycle until late 2024 or even 2025 to prevent a resurgence of inflationary pressures. If the FOMC chief confirms expectations of higher interest rates for an extended period, it could boost US Treasury yields and the dollar, while potentially impacting gold prices negatively.

While rate hikes are no longer the default scenario following a 525 basis points tightening between 2022 and 2023, attention will be on Powell's response to queries regarding this topic during the media Q&A session. Any indication that the Fed might resume hiking or that some officials are considering this possibility would constitute a doubly hawkish outcome, potentially sparking increased volatility and a significant sell-off in risk assets.

Gold price technical analysis

Gold (XAU/USD) dropped sharply on Tuesday, breaching a couple key technical floors on the way down and hitting its lowest mark since early April. If losses accelerate in the coming sessions, Fibonacci support awaits at $2,260. Prices may start a bottoming-out process in this area during a retracement, but on a breakdown, we could see a move towards the 50-day simple moving average at $2,225.

In the event of a bullish reversal from current levels, resistance levels stand at $2,295, $2,320, and $2,355. Eyes will then be on a short-term descending trendline located at $2,390. While bulls may have a hard time taking out this barrier, the emergence of a breakout could set the stage for a potential rally toward $2,320 in the near future.

Gold price technical chart

S&P 500 technical analysis

The S&P 500 suffered a major setback on Tuesday, sinking more than 1.5% after falling short in its attempt to overtake confluence resistance in the 5,165/5,185 range. If the bears maintain control of the market in the near term, we could soon see a move toward the April lows at 4,690. Bulls have to defend this area tooth and nail; otherwise, a deeper pullback towards 4,855 could be on the horizon.

Despite the bearish outlook, traders are advised to be cautious and refrain from going against prevailing price action. With that in mind, if the S&P 500 pivots to the upside and finally manages to clear the 5,165/5,185 ceiling convincingly, sentiment could make a turn for the better, allowing prices to head towards the 5,260 area. Continued gains from here onwards would shift attention towards the record.

S&P 500 technical chart

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