The Fed's move on Wednesday to cut the target for Fed funds by a quarter point to 2.0% was widely expected. However, the shift to a perceived neutral stance was far more subtle than most analysts were anticipating.

While the policy statement reiterated that "economic activity remains weak", the sentence from previous statements that emphasized downside risks to growth was removed. Additionally, the "substantial easing" of monetary policy to date was stressed, suggesting that the Fed will indeed pause to assess its effectiveness.

Concerns were expressed about "subdued" household and business spending, along with further softening of labor markets. In the 18-Mar statement, only consumer spending and labor markets were highlighted.

The FOMC remains worried about the "considerable stress" that the financial markets remain under, as well as tight credit conditions and the deepening housing contraction. All of these "are likely to weigh on economic growth over the next few quarters."

The Committee reiterated modest optimism with respect to core inflation, suggesting potential for moderation in coming quarters. However, this expectation is based on the rather dubious notion that commodity prices will "level out". Uncertainty about the inflation outlook was changed to "remains high" from "has increased" in the previous statement.

Once again it was stated that "[T]he Committee will act in a timely manner as needed to promote sustainable economic growth and price stability." However, a more emphatic indication of their willingness to act if the economy continues to flounder was not forthcoming.

Yesterday's policy move was decided by an 8-2 majority, with Plosser and Fisher maintaining their bias for no change. The initial take of the market was that the tone of the statement remained rather dovish and that it may be premature to rule out further rate cuts.

Traders initially squared positions in the wake of the Fed announcement amid some uncertainty about what was implied. Short covering pushed gold back up $881, while the dollar retreated into the recent range. However, these moves could not be sustained and both returned to their pre-Fed levels in earlier European trading today as markets continue to digest the Fed's statement.

Gold has subsequently breached support at 862.40 and a challenge of the more formidable 850.00/849.15 level is at hand. The latter is defined by the previous long-standing peak from Jan-80 and the low from 22-Jan.

The dollar index has slightly exceeded the high end of the range that was established in Mar at 73.19. However, support in in the EUR-USD rate at 1.5341 (24-Mar low) remains well protected at this point. It's still hard to build a case that the dollar is basing and that this is anything more than a correction within the longer term downtrend.

Oil has retreated to the $110 area, weighed by the dollar weakness and the general unwinding of short dollar/long commodity positions. News that BP has restarted their North Sea pipeline has also contributed to oil's correction. With oil still well above $100 brl, there is little to suggest that a top is in place and while US demand may have slipped somewhat, global demand remains robust.

The ambiguity of the Fed statement may ultimately lead to the familiar themes of dollar weakness and commodity strength re-exerting themselves. At that point, we would look for gold to rebound into the recent range. A move back above resistance at 881.70/882.25 would ease short-term pressure on the downside.

Gold Market Movers:

US construction spending for Mar fell 1.1%, below expectations, versus +0.4% in Feb.

US personal income for Mar +0.3%, above expectations.

US initial jobless claims for the week ended 26-Apr rebounded 35k to 380k, well above market expectations.

US Monster job index for Apr +7 to 174.

The Fed, the falling dollar and the commodities boom