Oil has tumbled by about 20% over the past three weeks. While any relief in energy prices is certainly welcome, the primary reason for this decline is a rapidly slowing, and possibly recessionary economy. Government interference in the commodity markets is taking its toll as well, sparking an exodus of speculators and investors alike. Hardly cause for jubilation.

Not surprisingly, we've seen Wall Street under pressure the past several sessions on mounting concerns about the economy. While index futures portend a higher opening for US stocks this morning, the general tone for the market remains weak. A pessimistic assessment of the economy in the Fed's policy statement is likely, which could send stocks lower later in the session.

The Fed is widely expected to hold steady on rates today, despite the persistently high inflation rate. The Fed is hamstrung, concerned about inflation to be sure, but more concerned that any move to raise interest rates will further slow the economy and lead to additional job losses.

Of course, higher interest rates certainly would not do any favors to the weak housing market. The average 30-year fixed rate mortgage in the US is presently 6.35%. Beginning a tightening cycle now would push mortgage rates even higher, effectively killing demand in an already vulnerable housing market.

Renewed signs of weakness in the stock market is likely to result in additional diversification flows into gold. When you start thinking about where to shelter capital, given the present market conditions, traditional moves into cash or treasuries are not particularly attractive options. The insidious bite of inflation makes these two options net losers, while gold on the other hand has appreciated 37.4% y/y through July.

The recent retreat in commodity prices will probably be more important later in the week when the ECB announces rates. While the rate of inflation remains well above their comfort zone, commodity price relief may provide the ECB with a little breathing room, allowing them to take a less hawkish stance. This comes at a time when economic growth in Europe is looking increasingly weak.

This scenario has weighed on the euro in recent weeks as energy prices in particular dropped sharply. The EUR-USD rate tumbled below 1.5500 in earlier trading today, but support at 1.5460/68 has successfully contained the downside thus far. The range low at 1.5286 is not in immediate jeopardy.

The dollar index has approached the 74.00 level for the first time since mid-Jun, spurred by weaker commodity prices and a softer euro. However, the 74.31 peak from 13-Jun remains well protected at this point.

Given the weak economic outlook, expectations that interest rates in the US will remain very low, the ongoing credit/liquidity crisis, and expansionary monetary policy geared at preventing a collapse of the banking system, its difficult to justify a higher dollar. For all these reasons, the upside in the greenback is thought to be limited.

Signs of renewed dollar weakness would likely spark a recovery in the gold market. A short-term close back above $900 would be an encouraging signal, shifting focus back to the 50 and 100-day moving averages at 910/913.

Gold Market Movers:

FOMC rate announcement at 14:15 EDT.

US ISM non-manufacturing index for Jul above expectations at 49.5, versus 48.2 in Jun.

UK services PMI for Jul rose to 47.4, above market expectations, versus 47.1 in Jun.

UK manufacturing output for Jun -0.5% m/m, below market expectations.

Eurozone services PMI for Jun (final) confirmed at 48.3.

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