The Fed Rate: Will the United States Dare to Stress Test Its Economy?

Brent crude is trading above the $55/barrel mark Tuesday on news that a reduction in US crude oil inventories is predicted and Iraq’s announcement that oil production by the OPEC cartel may be cut. In fact, this is a matter of another 1% reduction; Iraq has cut production by 270,000 barrels per day instead of 210,000.

An additional factor could be events surrounding a potentially interesting new region for the Kurds, who have almost gotten their own state. Although a large number of the nearby states are skeptical of this initiative and Turkey has even begun talking about armed intervention, Kurdistan might potentially gain control over several oil-bearing regions, and this will change the balance of power in the region.

As usual, data on US crude oil inventories come out on Wednesday, and the forecast is negative for now, i.e., of a drop. But one must also consider that some US refineries have already officially stated that they are postponing autumn repairs in order to make more products.

On Wednesday, there is a Fed meeting that will decide the fate of the interest rate: according to predictions, it should not change and will stay at 1.25%. But there are quite a few discussions on this subject: The United States might recklessly put its economy through an extra stress test by raising the interest rate another 0.25% to achieve a stronger US dollar. The chances that the rate will not change are also fairly high. After all, the United States is again facing a number of questions regarding raising the debt ceiling.

In this situation gold, acting as a reserve currency, is behaving moderately positively: despite last week’s slight drop, it is still successfully recovering losses, holding on a bit above the $1313/oz mark.

If the Fed rate does not change, the dollar will again experience a weakening spiral, and this will prop up the cost of gold until the end of this week. Technically, gold might continue to trade within the $1300-$1350 price corridor. It is still attractive as a reserve currency but, let us repeat, a lot will depend on the US interest rate decision, since an increase might cause gold to drop locally to $1300 or even test lower levels.

Yuri Prokudin, exclusively for Olymp Trade

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