Let's be more careful this week! Buyers hope for a dovish Fed!

S&P Global will release the preliminary July PMI surveys on Monday. In case the Composite PMI drops below 50, from 53.2 in June’s final reading, growing recession fears could weigh on US T-bond yields and the USD. Market participants, however, could stay away from taking large positions ahead of the Fed’s policy announcements on Wednesday.

The US central bank is widely expected to raise its policy rate by 25 basis points (bps) to the range of 5.25-5.5% following the July meeting. In June, the Summary of Economic Projections showed that the majority of policymakers saw it appropriate to raise the policy rate at least twice more this year. Federal Open Market Committee (FOMC) Chairman, Jerome Powell, pointed that out whenever he spoke publicly on policy in the following weeks.

After the latest inflation data showed that the Consumer Price Index (CPI) rose only 3% on a yearly basis in June, down noticeably from 4% in May, investors turned reluctant to price in additional rate increases beyond July.

In case the Fed’s policy statement, or FOMC Chairman Jerome Powell in the post-meeting press conference, acknowledges softer-than-expected inflation readings and refrains from reiterating the need for one more rate hike, this could be seen as a dovish surprise. As a result, US yields could turn south and XAU/USD could gather bullish momentum.

On the other hand, a continuous push-back against the market expectation could help the USD outperform its rivals. Powell could reiterate the data-dependent approach and mention that one more rate increase will be in line with their projections. In that scenario, XAU/USD could come under renewed bearish pressure.

On Thursday, the US Bureau of Economic Analysis will release the first estimate of the second-quarter Gross Domestic Product (GDP) growth. The US economy is forecast to expand at an annual rate of 1.8% in Q2, a slightly softer pace than the 2% growth recorded in Q1. Even if a hawkish Fed outcome could help the USD find demand, a weaker-than-forecast Q2 growth could revive recession fears and weigh on the USD. A strong GDP print, at or above 2%, could have the opposite effect and lift the USD, causing XAU/USD to turn south.

Finally, the Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred gauge of inflation, will be watched closely by market participants ahead of the weekend. Without seeing the market reaction to the Fed outcome and the US GDP data, it’s difficult to piece together different scenarios explaining how Gold price could be impacted. Nonetheless, the monthly Core PCE inflation will be the key component to watch. A stronger-than-estimated increase in that data could support the USD.