After a big sell-off, gold is consolidating at $1,700. According to analysts, the upcoming Federal Reserve’s interest rate decision could be what gives the precious metal its new direction.
“Fed decision will determine the next move of gold price”
Gold started the second half of the year on a disappointing note. cryptocoin.com As you follow, DXY is trading close to its 20-year high. In this environment, the yellow metal fell nearly 6% in July and investors fled to the dollar for safety. However, OANDA senior market analyst Edward Moya says the Fed’s decision in July could be the event needed for gold’s next move. In this context, the analyst makes the following assessment:
This is a moment for gold to break the back of the precious metal or give hope that the highest tightening is priced in. Investors are optimistic that the economic slowdown will contribute to a faster decline with pricing pressures. This shows that the Fed’s tightening work could be by the end of the year.
Edward Moya says markets expect a 75 basis point hike on Wednesday. He adds that in this case, gold may continue to rise above the $1,700 level.
“Fed’s implied rate for September will affect gold outlook”
However, what Powell will say at the press conference after the meeting will be very important. This is especially true as there will be no updates to the Fed’s macro forecasts and point plans until the September meeting. If Powell hints that another 75 basis points gain is possible in September, the outlook for gold is likely to be more negative. Edward Moya comments:
The Fed will not lock themselves into a strong stance in the trajectory of future rate hikes. But he won’t be in a position to say that more aggressive rate hikes are on the table.
“Jerome Powell will be careful with the words he chooses”
FXTM senior research analyst Lukman Otunuga says markets remain extremely alert to statements about inflation and the future path of monetary policy. He notes that for this, Powell will pay attention to the words he chooses. In a statement on Tuesday, Otunuga talks about the awe:
The Fed is likely to underline its determination to quench inflation as the economy suffers more with policy tightening. There are also worrying signs from recent data on weakness in job survey data and unemployment claims.
A major concern: the recession
According to the CME FedWatch Tool, there is still a 25% chance for a 100bps increase in July. Also, the probability of a 25 basis point increase for September is 51%. At the same time, the probability of a 50 basis point increase is 41%. The probability of a 75 basis point increase is only 8%. One concern is the impending economic downturn, the timing of which is still being debated by analysts and investors. Edward Moya says the following on the subject:
Many parts of the economy are weakening. That’s why many expect the full impact of inflation to trigger a recession in the middle of next year. There are risks for recession this year. However, this should not be the basic situation. Raising rates at every meeting for the rest of the year is an easy decision. But a rate hike at the May meeting still needs convincing evidence.
“Gold will remain on hold until Fed rate decision”
The US dollar also took Steam ahead of the Fed meeting and the US Dollar Index climbed above 107. According to Lukman Otunuga, if the Fed advances by 75 basis points, that may not be enough to keep the dollar bulls in the driver’s seat. The analyst says such a move should be complemented by Powell’s hard-hitting hawk comments that have fueled speculation about more aggressive hikes this year. What if the Fed surprises the market with a smaller-than-expected increase? According to the analyst, it is possible that this will cause the dollar to fall. Otunuga explains the effect this has on the gold price as follows:
Gold will remain on hold until the Fed rate decision on Wednesday. It will be interesting to see how gold responds as the Fed moves forward with a 75-based rate hike. Will the precious metal weaken due to its zero-yield situation? Or will a weaker dollar limit limited losses?
“Continuing flow of funds to the dollar is putting pressure on gold”
But Bill Diviney, senior economist at ABN AMRO, says even a recession announcement won’t be enough to stop the Fed from tightening.
Michael Langford, director of corporate advisory firm AirGuide, notes that with a 75 basis point gain, bullion will keep the ground or trend lower after the Fed meeting, depending on how many shortings occur. Langford shares these predictions:
Rate hikes will continue for the next three months. This will put downward pressure on gold prices. Gold price will break below $1,700. The main reason for this is the continued flow of funds to the dollar.
“The relief we see in yields is a good sign for gold”
Meanwhile, US consumer confidence fell to its lowest level in 1-1.5 years this month. That points to slowing economic growth at the start of the third quarter, which could cut spending amid persistent concerns about rising inflation and higher interest rates.
The global economy is in the grip of a serious slowdown, according to Reuters polls with economists. Some key economies are at high risk of recession. Also, there is only a sparsely significant cooling in inflation next year. Senior analyst Edward Moya comments:
The relief we’re seeing in yields is a good sign for gold. There will be strong demand for the safe-haven if the persistent fear, geopolitical issues, and energy crunch in the stock market intensify. However, that will be a problem for gold if investors feel the Fed is ready to raise another 75 basis points in September.
Giovanni Staunovo predicts gold will drop to $1,600
Gold is a non-interest bearing asset. For this, rising interest rates make it less attractive. However, gold is widely regarded as an inflation hedge and a safe store of value amid economic uncertainties. UBS analyst Giovanni Staunovo predicts that gold will drop to $1,600 by the end of the year, saying:
Especially in the second half of 2022, while the inflationary risk decreases, we expect a further increase in real interest rates this year. Therefore, additional liquidation of exchange-traded funds is possible.
