Yesterday, the US Federal Reserve softened its rhetoric with regards to monetary policy. The regulator left the key rate unchanged at 1.00% – 1.25%, although it did lower its long-term “neutral” interest rate from 3.0% to 2.8%. This was made known in the FOMC’s advance release of their economic projections, published on the Fed’s website yesterday, the 20th of September, at 21:00 (GMT+3):
Here, we can see that the Fed has downgraded its forecast for the “longer run” from 3.0% in June to 2.8% now. The “central tendency” ranges for 2018 and 2019 have also been downgraded, which could potentially slow down the trajectory of the rate hike cycle. The Fed also announced that they would start the process of normalising their balance sheet in October. The parameters of this process are outlined on the New York Fed’s webpage. At the FOMC press conference, Janet Yellen stressed that if the economic situation starts to worsen, the Fed is ready to halt the balance sheet reduction and even, if necessary, lower interest rates.
In my opinion, the reduction in the neutral rate projection and the potential trajectory of the cycle of interest rate hikes is a clear signal that the Fed is looking to raise rates more gradually, which should have a positive influence on the US economy and provide support to the US dollar as a result. After yesterday’s loosening of monetary policy, I reckon that this has opened the way for the dollar to recover some of its losses against the euro, pound, franc, yen, and gold in October and November.
I’ll be considering a long position on USDCHF and a short position on gold. At the time of writing, the USDCHF pair is trading at 0.9717, while XAUUSD is at 1,298.90 USD.