Speech by Federal Reserve Chairman Jerome Powell sparked expectations for smaller rate hikes. Gold prices then hit a two-week high on Thursday, supported by the weakening dollar.
Two scenarios for gold prices, according to employment report
Fed Chairman Jerome Powell gave a speech at the Brookings Institution in Washington on Wednesday. Powell said in a statement that the Fed could reduce the pace of rate hikes “as soon as December”. The dollar index fell 0.5% after that, making gold more attractive to offshore buyers. City Index Analyst Matt Simpson comments:
Powell effectively announced that the Fed will slow the pace of tightening. This caused the dollar to fall and gold to rise. A strong jobs report will give the Fed the green light to continue the march as inflation remains high. This is the worst scenario for gold. A weak report could be beneficial for gold prices as it points to lower consumer demand that is deflationary going forward.
China and the Powell effect on gold prices
Market participants are now giving a 91% chance for a 50bps increase at the Fed’s December meeting. Also, investor attention is now turning to nonfarm payrolls data from the US Department of Labor, due Friday. These data are likely to influence the Fed’s policy decisions.
Traders are also weighing in on the news that China, the biggest bullion consumer, is easing some restrictions on Covid. Brian Lan, managing director of Singapore-based dealer GoldSilver Central, said: “Demand for physical gold will increase if China relaxes its Covid measures and the economy starts to recover. Therefore, the demand for industrial metals will also increase,” he says. Tai Wong, a senior trader at Heraeus Precious Metals in New York, comments:
The market focused only on Powell’s clear signal that rate hikes will slow to 50 basis points in December when the precious metal complex rally. Market ignores the remainder of Powell’s speech, which highlights no longer higher and no early rate cuts
“Gold prices aim for a consolidation phase”
Gold remains capped at $1,797 on the 200-Day Moving Average (DMA). Strategists at Credit Suisse expect a consolidation phase to emerge from here. In this context, strategists draw attention to the following levels:
It has a small gold base. However, it was limited by the critical 200DMA currently seen at $1,797. We expect a consolidation to emerge from here. Support below $1,729 is needed to dampen the range spikes. However, with a break below the 55DMA at $1,688, retesting the YTD low at $1,614 would need to regain some downside momentum. Above the 200DMA at $1,797 is needed to open the door to a more meaningful recovery for a rally to $1,877 June high.
“Gold will go on the defensive in early 2023”
cryptocoin.com Historically, dollar levels have had a significant impact on gold. Analysts at HSBC expect gold to stay on the defensive in early 2023 and move up as the year progresses. Based on this, analysts make the following statement:
The dollar is likely to weaken in 2023 amid global growth bottoming out, interest rate volatility peaking and risk sensitivity rising. A weak dollar will likely be positive for gold prices.
Meanwhile, according to analysts, some easing in inflation pressures in the US has questioned the pace of the Fed’s rate hikes, but the latest comments from Fed officials confirm that the tightening continues. Analysts believe that Fed tightening will remain a major downside for gold at least in the first quarter of 2023. Accordingly, they make the following predictions:
We expect the underlying outlook for physical demand for gold bars and coins to remain strong amid continued inflation concerns and geopolitical and financial market risks. The demand for jewelery should also be stable. After the sharp increase in the central bank’s Gold demand in 3Q22, the outlook for official sector Gold demand may also be resilient in 2023. Considering all factors, we expect gold to remain on the defensive in early 2023. We also foresee that it will move upwards as the year progresses.
