Gold Price, Dow, DXY React to January 2021 Fed Rate Decision

GOLD, DOW JONES, US DOLLAR – MARKET REACTIONS TO JANUARY 2021 FEDERAL RESERVE ANNOUNCEMENT

• Federal Reserve holds its policy interest rate and pace of asset purchases steady as expected
• US Dollar continues to trade on its front foot while gold and the Dow remain under pressure
• Focus now shifts to expected remarks from Fed Chair Powell following the FOMC statement

The Federal Reserve just announced that it plans to leave its benchmark interest rate range unchanged at 0.00-0.25% and maintain the current pace of asset purchases at $120-billion per month. Markets have moved little in the immediate reaction seeing that the latest FOMC decision to stand pat on policy was widely anticipated. Fed officials noted that the pace of economic activity recovering has moderated in their statement, though this also comes as little surprise. That said, key assets like gold, the Dow Jones, and US Dollar were doused with a wave of volatility leading into the Fed statement release.

One driver could be traders speculating on whether or not Fed Chair Jerome Powell will provide less-dovish forward guidance during his press conference set to kick-off at 19:30 GMT. To that end, it is worth noting that the head central banker stated how “now is not the time to be talking about changes to asset purchases” just two weeks ago. Nevertheless, in light of recent GameStop mania, arguably a byproduct of frothy market conditions, traders will likely be sitting on the edge of their seats plugged into the Powell presser for hints as to when the Fed might start to siphon liquidity.

GOLD PRICE CHART: 15-MINUTE TIME FRAME (26 JAN TO 27 JAN 2021)

Chart by @RichDvorakFX created using TradingView

Gold price action is trading -0.3% lower on the session at the time of writing. The precious metal plunged as much as -1.1% intraday to the $1,830-price level before clawing back some downside. It appears that gold prices have been largely mirroring the direction of the US Dollar, which has found a fresh bid owing to the influx of risk aversion and demand for safe-haven currencies. Gold and the US Dollar typically move in opposite direction of one another.

The broader bullish narrative underpinning gold price action likely remains intact so long as the Fed continues to stand by its uber-accomodative monetary policy commitment. On the other hand, if FOMC officials like Chair Powell point to a less-dovish policy stance on the not-too-distant horizon, gold prices could come under considerable pressure. Not to mention, if the recovery in economic activity continues to stall, future inflation expectations could peel back and weigh negatively on gold price action also.

DOW JONES PRICE CHART: 15-MINUTE TIME FRAME (22 JAN TO 27 JAN 2021)

Chart by @RichDvorakFX created using TradingView

Major stock indices are still trading on their back foot in the wake of the FOMC statement release. The Dow Jones Industrial Average is currently down -1.3% with market sentiment seemingly deteriorating. Stocks in the Dow Jones could trade similarly to gold considering Fed liquidity and the pace of economic activity pose two primary drivers of their direction. As such, the Dow and equities more broadly could face headwinds if Fed Chair Powell opts to talk down investor risk appetite during his presser. This could bring the US Dollar into focus as a potential bellwether to where markets head next.

US DOLLAR INDEX PRICE CHART: 15-MINUTE TIME FRAME (26 JAN TO 27 JAN 2021)

Chart by @RichDvorakFX created using TradingView

The US Dollar has strengthened broadly so far today gauging by the DXY Index. US Dollar upside largely tracked the risk-off lead from markets earlier this morning prior to the FOMC statement release. Continued US Dollar strength could follow a cautious tone conveyed by Fed Chair Powell regarding the economy. Conversely, if Fed Chair Powell echoes that the central bank intends to leave financial conditions accommodative, there could be a resumption of the broader bearish US Dollar trend. Here are technical levels to watch for the US Dollar.

-- Written by Rich Dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight