Good Morning,

Bullion trading went into slow-motion replay mode overnight as players chose to sit on the sidelines rather than take on positions ahead of the Fed communique. Confined to a 1% range, gold meandered between $883 and $891 as little action in crude oil or the dollar echoed the same wait-and-see attitude among participants. Hopefully, the Fed statement will be a lot less equivocal than what was said by Mr. Trichet today, over in Euroland.

In one of the more oblique and riddling jawboning sessions in recent memory, the head of the ECB said that we [the ECB] could increase rates by a small amount in order to secure a solid anchoring of inflation expectations. I didn't say that we could envisage a series of increases. That being said, of course we never pre-commit.'' Got that? The statement was so...clear that some analysts reminded us that the last time the ECB did not 'envisage' a series of increases (three years ago) they went on a rate hike binge of eight adjustments. For today however, the cryptic words of Mr.T did not help the euro.

The mid-week session in New York had gold opening on the downside by a small amount. Bullion was quoted at $885.80 down $3,60 as the trade awaited new home sales and durable goods orders numbers in the pipeline. Speaking of which, oil was very quiet, hovering just under $137 ahead of US inventory data (expected to show a decline). Ditto, the dollar which held just above 73.15 on the index. Silver puzzled players this morning, advancing 6 cents to $16.71 while platinum fell $11 to $2001 and palladium lost $5 to $459 per ounce. Update: Durable goods orders came in unchanged, but were better than consensus expectations.

Fuzzy or not, the ECB head's words still point to a rate increase in July. Fuzzy or not, today's Fed communique will likely mark a shift in policy and underscore that the period of easy money that began in September has drawn to a close and that a reversal in direction is coming. It is a question of when. The Fed might not be blunt about the change in focus, as too strong a tone would upset fragile markets. Bloomberg's Steve Matthews dissects the subtext of what we might hear later today:

Chairman Ben S. Bernanke and his colleagues are laying the groundwork for a policy shift after oil prices doubled in the past year and inflation exceeded 4 percent. At the same time, they may be reluctant to go too far because the economy has yet to shake off the credit crunch and bank losses are deepening. The Federal Open Market Committee will leave the benchmark interest rate at 2 percent today, ending the fastest series of reductions in two decades, according to all 102 economists surveyed by Bloomberg News.

``They are going to lean a bit more to inflation risks than growth risks, and may provide a hint they could hike rates down the road,'' said Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc. in New York. ``They will signal their concern in a subtle way, not explicitly. They don't want to have a statement that would tie their hands.''

Bernanke in a June 9 speech said that risks of a ``substantial downturn'' in the economy had diminished. He also flagged concerns about consumer prices, and warned that the Fed will ``strongly resist'' a leap in inflation expectations. In the statement after their April 29-30 meeting, policy makers predicted inflation would ``moderate in coming quarters'' with a ``leveling out'' of commodity prices. Since then, gasoline prices have surged 13 percent to a record, and consumer expectations for average inflation over the next five years reached the highest since 1995.

Bernanke's warning this month spurred traders to bet on a rate rise. There are 33 percent odds of a boost in August and 88 percent in September, according to contracts quoted on the Chicago Board of Trade.

In its April 30 statement, the FOMC avoided specifying whether weaker growth or faster inflation was the greater concern. In their paragraph telegraphing policy priorities, officials may reiterate they will ``act as needed'' to promote both economic expansion and stable prices, Fed watchers said.

``It's a delicate balancing act -- don't look for a signal of a strong inclination for raising rates,'' said Michael Feroli, a former Fed researcher who is now an economist at JPMorgan Chase & Co. in New York. One way of strengthening the message on inflation would be to echo the emphasis that Bernanke, Vice Chairman Donald Kohn and other officials have placed this month on keeping inflation expectations in check. In its last statement, the FOMC said it was important to monitor price developments ``carefully.''

``They might emphasize their concern with inflation expectations, saying that it will be necessary to continue to monitor inflation developments, and particularly inflation expectations, carefully,'' said former Fed governor Lyle Gramley, who is now senior economic adviser Washington for Stanford Group Co., a wealth-management firm.

Gold needs to hold on to the $880 mark at the moment, lest it should dip back towards the $850/$860 area. Some post- Fed pressure on the yellow metal and gains in the dollar are the consensus expectations among speculators this morning. The bigger picture is what matters, however. While short-term prospects are still good, the more remote horizon holds some questions and/or adjustments in store for gold. At least according to BNP Paribas SA which said today that a stronger dollar would probably mean a weaker gold price in the next several months. ``Gold should trade within a $750-950 range over the next six months, before it weakens significantly in 2009,'' the bank said in a report. Gold will trade at about $700 in 2009 and the first half of 2010, according to the bank.

Happy Trading.