Today, the Federal Reserve is due to release a statement from its July meeting. What can we expect and how can it affect the gold market?

The Fed is expected to leave interest rates unchanged. The market probability of a rate hike this month is about 3 percent, according to the CME’s FedWatch tool. There will be no press conference and no updated economic projections, so all eyes are on the statement.

Investors will be looking for some clues about the timing of the next hike and the Fed’s balance sheet normalization plan. The market consensus is that the U.S. central bank will announce the unwinding of its balance sheet in September and will hike interest rates in December.

We argue that the economic outlook remains cautiously positive which justifies gradual tightening, so there should not be major changes to the FOMC stance (the following minutes may be more disruptive). However, the probability is skewed toward a slightly more dovish tone because of subdued inflation in the last few months (however, the recent weakness of the U.S. dollar should support inflation somewhat). Actually, the inflation rate has been slowing down since February and some FOMC members have already expressed their concerns about that development.

Hence, a statement less dovish than expected should be negative for the gold market, while one more dovish than consensus could support the current rally in gold. Although the FOMC decision may be a non-event, investors should remember that the last meeting was surprisingly hawkish. Actually, meetings used to be a bit more hawkish than the minutes, as there is no room for long discussions and diverging opinions. Moreover, the EUR/USD exchange rate seems to be at such a level that a correction is possible.

Fed’s statement may provide a needed catalyst for such a move. In such a scenario, gold may be hit. Will that happen? Only time will tell.