The Fed will announce the target for Fed funds on Tuesday. The market is widely expecting the FOMC to leave rates unchanged at 2.0%. With seven consecutive months of job losses and the unemployment rate at 5.7%, there is little chance of a rate hike before Dec. If the economy continues to slow and employment trends remain weak, the Fed is likely to forestall the launch of any tightening campaign into Q1-09.

Of course this does not bode well for inflation. CPI surged 1.1% in Jun, the biggest monthly jump since 1982. The government's measure of inflation is now more than 5% year-on-year, although in reality, inflation is probably more than twice that figure. July CPI comes out late next week and another, albeit more modest, increase is anticipated.

While the Fed will undoubtedly continue to voice their concern about price risks, emphasis will remain on growth and employment risks ahead of the November election. Advance Q2 GDP last week showed that economic growth remains rather anemic at just 1.9% y/y. While a recession has yet to be confirmed, the risk remains considerable. Certainly the employment trend is recessionary.

The recent extension and expansion of the Fed's liquidity schemes is further evidence that a rate hike is likely to happen later rather than sooner. Pumping liquidity into the banking system and raising rates simply doesn't make much sense. The fact that the Fed feels the need to continue injecting liquidity is worthy of note, suggesting that the credit/liquidity crisis is probably far from over.

The market will be eying the Fed's policy statement very closely tomorrow for any heightened concern about inflation. However, you may recall that price risks prompted Fed Chairman Bernanke to take a very hawkish tone in June. The dollar surged on expectations of a rate hike this summer, which subsequently fizzled. I expect the Fed to continue attempting to inflate their way out of this potential recession.

The BoE and the ECB will make their decisions on rates this week as well. Despite the fact that inflation remains well above comfort zones, slowing economic growth is likely to lead both banks to hold steady on rates at 5.0% and 4.25% respectively.

In the UK, indications that growth is slowing rapidly make any tightening move by the BoE unlikely. However, CPI is expected to remain above 4.0% for the remainder of the year and there are persistent risks of a jump in inflation expectations. Consequently, the BoE will have a hard time justifying an easier monetary policy.

The UK is also considering a sizable rescue of the housing industry that will include pumping billions of pounds into the mortgage markets. as previously stated: Raising rates while adding liquidity is rather counterproductive.

Eurozone PPI for Jun came out this morning at +0.9%, pushing the year-on-year rate to a new record of 8.0%. With HICP presently more than twice the ECB's comfort level of 2.0%, one might expect the tone of the press conference on Thursday to remain rather hawkish.

The recent softening of oil prices may give the ECB a little bit of breathing room, allowing them to hold steady this time around. However, pass-through effects of previous jumps in energy and food prices continue to drive prices higher. I'm guessing that the ECB will ultimately hike rates again, before the Fed gets around to their first rate hike.

The prospect of a continued widening of interest rate differentials should weigh on the dollar. Recent upticks in the greenback have failed to gain any traction. The dollar index rebounded a mere 4.4% off its all-time low in June, following very hawkish comments from Fed Chairman Bernanke. Since then, the dollar has been languishing in a narrow range. Forecasts that suggest the dollar has bottomed seem extremely premature.

If the dollar resumes its long-term downtrend, we would expect gold to reestablish its long-term uptrend. A short-term close back above the 50 and 100-day moving averages at 911.00/913.80 would likely trigger additional retracement into the 930/950 zone. Penetration of the latter would put the mid-Jul high at 988.00 back in play. Above that, scope would be for renewed probes above $1,000.

Gold Market Movers:

US factory orders for Jun surged 1.7%, well above market expectations, versus +0.9% in May.

US personal income for Jun +0.1%, above expectations. PCE +0.6%. Core prices +2.3% y/y.

Eurozone PPI for Jun +0.9% m/m, 8.0% y/y a new record.

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