Gold faces test at key support level of 3360

On Thursday (19 June) at midnight, the Federal Reserve announced that it would keep the federal funds rate unchanged at 4.25% to 4.5%, marking the fourth consecutive meeting at which it has held rates steady. The dot plot showed that the median forecast for the federal funds rate at the end of 2025 remained unchanged at 3.875%, leaving room for two more rate cuts. However, the Federal Reserve reduced its expectations for rate cuts in 2026 and 2027 by one each, bringing the total number of expected rate cuts to four, or a cumulative reduction of 100 basis points.

Notably, divisions among Fed officials have intensified, with ten officials expecting at least two rate cuts this year, down from the number in the previous forecast released in March. Seven officials expect no rate cuts, up from the previous forecast.

The primary cause of this divergence is undoubtedly the U.S. tariff policy and the escalating Middle East conflict. Powell explained that the recent decline in inflation data is to some extent related to the cooling of the housing market, while the impact of tariffs on inflation may be more persistent, and he expects to see more significant inflation in the coming months. The main reason is that it takes time for the impact of tariffs to be passed on to consumers, and he expects many companies to pass on tariff costs to U.S. consumers.

According to the latest Summary of Economic Projections (SEP), the core PCE inflation rate is expected to be 3.1% in 2025, up from the March estimate of 2.8% and well above the 2.4% actually reported in April. Additionally, the SEP has lowered GDP projections for this year and next year while raising unemployment rate projections for this year, next year, and the year after, highlighting the ongoing risk of stagflation in the U.S. economy.

The Federal Reserve is focusing more on inflation than on the economic outlook, with gold once again testing the key support level of 3,360.

The Federal Reserve believes that the impact of tariffs on inflation is about to become evident, while also warning that inflation forecasts are subject to variables. Overall, the conditions for the Federal Reserve to cut interest rates may require a weak labour market or stronger evidence that the rise in inflation is moderate. Given that the tariff exemptions for major economies and China expire on 9 July and 12 August, respectively, and that trade negotiations are progressing slowly, coupled with uncertainty in the Middle East, inflation is difficult to assess clearly in the short term.

However, overall economic uncertainty is declining, and the labour market supply is shrinking, indicating that the job market is cooling down, but there is no cause for concern. Therefore, the Federal Reserve's current focus remains on inflation taking precedence over the economy, which suggests that the timing of rate cuts may be further delayed, while the scope for rate cuts may still have room for adjustment.