Gold, Dow and US Dollar Outlook

PRIOR TO FED MEETING: GOLD PRICE, DOW JONES, VOLATILITY IN US DOLLARS AROUND FOMC ADS

• The Federal Reserve plans to announce an interest rate decision on Wednesday, July 29.
• FOMC meetings tend to cause large changes in volatility measures between asset classes
• Gold, the Dow and the US dollar could react violently to comments by Fed President Powell

Operators are usually on high alert each time a FOMC decision must be made. the Federal Reserve – now the largest central bank by total assets held on its balance sheet – often causes market volatility with periodic scheduling monetary policy updates. Evidence of above-average market activity around the Fed meetings is indicated by volatility measures, such as the average true range (ATR), recently taken for gold, the Dow Jones, and US dollar index.

GOLD PRICE VOLATILITY ON THE FOMC DECISION DAY (GRAPH 1)

The performance of the gold price on the FOMC decision days tends to fluctuate dramatically compared to the average volatility of gold. The intraday range marked by gold each time a Fed announcement crosses the wires is generally higher than its respective 20-day ATR. This is highlighted by the predominantly positive ‘relative volatility’ series, which reflects the percentage that intraday volatility is above or below its average daily range during the previous month.

DOW JONES PRICE VOLATILITY ON FOMC DECISION DAY (FIGURE 2)

Similarly, stocks have historically experienced high market activity around Fed meetings. Intraday ranges recorded by the Dow Jones Industrial Average each time a FOMC statement is released also suggest that overall, the Federal Reserve can catalyze excess volatility.

Read more – Nasdaq, S&P 500 Outlook: FOMC correction potential as Hope boosts supply

VOLATILITY OF THE UNITED STATES DOLLAR INDEX PRICE ON FOMC DECISION DAY (FIGURE 3)

The USD price action following the FOMC meetings also paints a narrative that underscores the rise volatility T readingshis indicated by US dollar index performance which have A tendency to print larger than normal fluctuations around the Fed’s interest rate decisions.

Said that prudent market participants may want consider thoroughly adopting risk management techniques– I like it placing tighter stops or running smaller position sizes – when gold, the Dow and the US dollar are trading at a Fed meeting.

Read more – US Dollar Marks Big Drop for July as Consumer Confidence Declines

— Written by Rich Dvorak, Analyst DailyFX.com

Connect with @RichDvorakFX on Twitter to know the market in real time