Markets are gearing up for Fed Chairman Jerome Powell’s keynote speech at the Jackson Hole symposium. After a bad start to the week, the gold price is looking for a turnaround. Analysts explain how the effects of Powell’s speech will be and share their predictions.
What will be the theme of Jackson Hole?
On Tuesday, the US dollar index pulled back from a 20-year high. Gold rallied impressively as bargain hunters arrived after last week’s sale. cryptocoin.com As you follow, the biggest catalyst for markets this week will be Powell’s speech at Friday’s Jackson Hole meeting. Andrew Hunter, senior US economist at Capital Economics, comments:
The theme proposes to focus on the supply side of the economy. As the pressure on global supply chains eases, this means that a relatively modest slackening in demand could bring about a reduction in inflation. It’s an important basis for our view that a recession can still be avoided in the coming quarters. The Fed is clearly hoping for a similar result. Authorities are likely to support this situation next week.
“There are two options for the markets”
US dollar and US Treasury rates continue to be the dominant drivers of gold. Every time the gold price rises, it pulls back. Therefore, any drop triggers a rally in the precious metal. FXTM senior research analyst Lukman Otunuga comments:
The dollar continues to gain plenty of strength from risk aversion and fears about the Fed re-emphasizing its hawkish message this week. This is likely to boost the dollar if Powell strengthens expectations for the Fed to move forward with another jumbo rate hike in September and further tightening in the future. Alternatively, a cautious Powell voicing his concerns about the US economic outlook is likely to weaken the dollar, reducing the likelihood of major rate moves.
Markets are divided over whether the Fed will raise 50 or 75 basis points at its September meeting. CME’s FedWatch Tool shows a 51.5% probability of a 50bps increase. It also points to a 48.5% probability of a 75bps increase.
Key point for gold price: What will Jerome Powell say?
It is known that the Fed used the Jackson Hole symposium to signal significant changes in monetary policy. However, this time, analysts do not expect any significant changes. Because Powell will want to give the Fed maximum flexibility before the September meeting while he awaits another set of employment and inflation figures. Win Thin, head of BBH Global Currency Strategy, said:
We don’t think the Fed will corner itself before the September 20-21 FOMC meeting. Instead, we expect the Fed to try to manage market expectations in Jackson Hole.
So far, the Fed has been pretty consistent in staying hawkish, despite some mixed signals from the latest meeting minutes released last week. Minutes from July’s FOMC meeting showed that Fed officials had finally agreed on the need to slow the tightening cycle. However, he also stated that the Fed should first see how rate hikes affect inflation. Worries about another extremely high rate hike by the Fed amid rising recession fears are eroding risk sentiment in the market. Gold needs to take advantage of it. Lukman Otunuga explains his views on the subject as follows:
Investor concerns about inflation are grappling with concerns about tightening US monetary policy and fears of a recession. Also, there is strong unrest in the financial markets. It will be a big week for the markets, thanks to the annual symposium where central bankers and financial heavyweights gather to discuss major economic issues.
The big takeaway everyone is looking for is additional information on the Fed’s thoughts on inflation, the economy, and the future of monetary policy. “What Powell announced or chose to hold during the speech is likely to determine the trajectory of global markets in the coming weeks,” Otunuga says.
“Wall Street shouldn’t be surprised by that!”
According to analysts, Powell will likely strengthen his hawk stance on Friday. It will also retract some of the markets’ new thinking around a potential Fed axis. Nicky Shiels, head of metal strategy at MKS PAMP, comments:
The Fed chairman is expected to reiterate his determination to continue the march to contain prices. Here it is possible that even if they have a slower rate of increase, it is possible to send a clear message that they will not be quick to rotate and lower rates. If few in the US government truly believe we are in a recession, how can you justify pausing interest rates?
It is also widely expected that the Fed chair will try to be as simple as possible when opposing the idea of a Fed pivot. Edward Moya, senior market analyst at OANDA, comments:
Even if rate hikes are slower, it’s likely to try to send a clear message that it won’t signal a lower peak rate or that they will cut rates quickly. Wall Street shouldn’t be surprised if, after this week, Fed funds futures begin pricing rate increases for next year. It’s possible that this was the week many returned from vacation and doubled their bear market rally calls.
“Potentially a new spark for the price of gold!”
Analysts are split on where gold is headed. But they are confident the precious metal will be very volatile this week. Lukman Otunuga explains:
Powell’s comments will potentially serve as a new foundational spark for gold. Thus, the potential for volatility is high in the precious metal this week. If prices can exceed $1,724, there is a sell-off towards $1,700 on the cards. Alternatively, a move above $1,752 is likely to open a reversal towards $1,770 and $1,800, respectively.
“It is possible that the pigeon surprise sparked the gold rally”
Nicky Shiels refers to taking the appropriate tactical position. He also notes that it is possible for any pigeon surprise to spark the gold rally. In this context, Shiels underlines the following:
Structurally, the market remains either stable or short. Also, tactically, asymmetric risks are clearly building in September. So: short position + seasonal up + low prices + dove Powell. A bullish setup/reversal is likely this week or after Jackson Hole.
“Gold price will eventually settle into a trading range”
On the other hand, Moya says an aggressive Fed will mean a lower floor price for gold on the decline. Based on this, Moya records the following:
The gold price will eventually settle into a trading range. However, the base is likely to be slightly lower as energy and food inflation risks could keep the Fed aggressive with rate hikes in the new year. Before hearing from Powell, gold is poised to stabilize above the $1,750 level.
