The short dollar trade is in full force among investors, even with the recent consolidation last week. The Fed meets in the next hour tonight, and the wide expectations are that they will maintain an overall dovish stance and possibly even deliver on some of the super-dovish expectations, such as increasing the size and/or duration of QE purchases. 

 

It’s important to note the risks, however. Namely, short-dollar positioning is still extremely oversold. Although the short positions may be for valid reasons, if the Fed retains a more neutral stance than the market expects, there is a risk that the dollar rebounds today. This would mean EURUSD reversing lower, with gold and silver likely to follow down too.

 

Still, talking about probabilities, it’s unlikely that the Fed would want to risk sounding too hawkish, particularly as that may complicate their job of supporting the recovery later down the road. Chairman Powell has sure learned his lessons of miscommunicating with the markets some two years ago, and it seems fair to bet that he won’t repeat those mistakes. Especially not in such fragile times like now.

Considering the above, the path is clear for gold to resume the advance higher. Even if the Fed disappoints a little bit and that precipitates another sell-off in precious metals and a bounce in the dollar, that is likely to prove a good opportunity to buy gold at lower levels and sell the dollar at higher levels. After all, if the Fed doesn’t deliver the easing now, it will do so next time. With the Fed keeping rates low, real yields stay negative and should continue to support precious metals higher.

 

If a new bull leg has started with yesterday’s bounce, it is likely to take gold toward the $1,900 - $1,920 area where it would meet the next resistance. This would be our target for a long trade. The stop loss is below the $1,818 low of the bullish engulfing candle.

 

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