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Following a decent rally yesterday in the aftermath of a weaker dollar and declining yields, the gold market is now weaker Thursday as the Dollar Index stages a rebound. Prices may also be feeling the pressure of a better-than-expected GDP report which showed the first estimate of Q3 GDP up 2.6%. This was higher than the forecast for a rise of 2.3% and could give the Fed more leeway in keeping its foot on the gas pedal with interest rate hikes. The economy has shown some strong resiliency in recent months towards inflation and other factors and may possibly avoid a recession even if the Fed remains aggressively raising interest rates.

The European Central Bank hiked interest rates today by .75%. This is the second .75% hike in a row for the ECB and rates in the region now sit at 1.50%. The Euro Zone will have some work to do to catch up to the U.S., however, where interest rates are now at 3-3.25%. The U.S. central bank will almost certainly raise rates again at its November meeting. That hike will be followed up by another hike in December. The Fed may raise rates by another 75-basis points next month. That would mark the fourth consecutive hike of 75-points by the Fed as it looks to aggressively battle inflation. The December hike could be a little smaller, with many analysts suggesting the Fed may hike by 50-basis points to end the year.

How the Fed proceeds early next year may be the determining factor for markets in 2023. The Fed has maintained its hawkish stance and rhetoric. Many felt the Fed would signal a pause or even reversal in its posture by now, but that has not been the case as of yet. At a time with so many unknowns and sources of anxiety, the Fed may want to preserve its credibility and stick to its guns no matter how painful it could get for the economy. The Fed has acknowledged these risks already yet seems intent on staying the course.

Rate hikes do take some time to work their way through the economy. As 2023 begins, the Fed could decide to take a breather and allow some time to pass to monitor the effects of their previous rate hikes. Of course, what the Fed does or does not do may be dictated by inflation and the data. If price pressures remain at 40-year highs or move beyond, the central bank could be forced to act even more aggressively, possibly even hiking rates by 100-basis points. If inflation shows some signs of having peaked, however, the Fed could take an increasingly dovish approach to policy and take a pause from the rate hiking business. Whatever the case may be, numerous markets including the Dollar Index, treasuries and gold all stand in the balance. For the time being, the $1600 and $1700 levels are keys for the bulls and the bears. Whichever is breached first may dictate price action for the months ahead.