Gold prices fell $40 on Thursday. Markets began pricing in a 100 basis point rate hike by the Fed at its July meeting. As a result, it briefly traded below the $1,700 level.
Fed’s 100 basis point hike gains strength
cryptocoin.com As you can follow, annual CPI and annual PPI increased by 9.1% and 11.3% in June. For this reason, the latest inflation figures announced in the USA shocked the markets. After that, interest rate hike expectations were quickly repriced.
Prior to the inflation data, markets saw a near 100% chance for a 75 basis point increase at the Fed’s July 27 meeting, according to the CME FedWatch Tool. However, within 24 hours of the figures’ release, expectations shifted to an 80.9% chance of a 100 basis point gain. This puts the Fed Funds Rate in the 2.50% – 2.75% range. Francesco Pesole, FX strategist at ING, comments:
Just yesterday morning, the market finally priced in a full 75 basis point rate hike for the first time in July. In a matter of hours, an above-consensus CPI data in the US and a surprise 100 basis point rate hike by the Bank of Canada changed the whole picture again. After these two events, markets began to seriously consider a 1.0% rate hike by the Fed in two weeks.
Craig Erlam: Gold prices feel heat from inflation data
The Bank of Canada surprised markets with an increase of 100 basis points on Wednesday. He also warned that inflation will remain high for the next three months. Craig Erlam, senior market analyst at OANDA, said:
The Bank of Canada jumped to triple-digit gains shortly after the US CPI announcement. He also acknowledged that he has underestimated inflation since spring last year. The yellow metal is feeling the heat from the inflation data. In response to this, it makes an aggressive tightening. After seeing the peak we can have in the US right now in the inflation data, we can see it growing in popularity. But upside surprises trend will leave investors cautious
BREAKING: #Gold extends losses to trade sharply down and at 11-mo. low as USDX, bond yields sharply up today and crude oil solidly down, at 3-mo. low. August gold down $37.50 at $1,698.00. #kitconews pic.twitter.com/LoJ42QVa93
— Kitco NEWS (@KitcoNewsNOW) July 14, 2022
Daniel Ghali: Gold bugs are falling like dominoes
Gold faces many obstacles. But recession fears can be helpful. The precious metal broke below $1,700 on Thursday. With this move, it tested an 11-month low and approached pre-pandemic levels. Daniel Ghali, senior commodity strategist at TD Securities, comments:
There may be a big surrender event going on underneath. Gold beetles are falling like dominoes. With prices challenging pre-pandemic levels, the risks of a major capitulation event in precious metals are increasing.
“EUR/USD volatility is likely to increase”
The US dollar index continues to trade at 20-year highs. In addition, interest rate hikes and oil sales continue. In this environment, downside price pressures are increasing, according to analysts. Francesco Pesole shares his predictions:
The volatility around EUR/USD is likely to continue to rise. Also, it is likely to affect other USD pairs. We think the current repricing in Fed rate expectations (along with other factors) could support the dollar at this stage. In addition, we anticipate that a more stable break below 1,000 in EUR/USD could strengthen the dollar overall.
“Gold prices may fall further”
Craig Erlam says a break below the next support level at $1,680 and $1,700 is still very likely. But once the peak is in place and we see inflation pressures recede, it’s possible to see gold back in favor as the economy plunges into recession.
Daniel Ghali notes that a drop below the pre-pandemic levels between $1,650 and $1,700 could trigger an even larger sell-off in the precious metal. In this context, he makes the following statement:
If prices trade below pandemic-period entry levels, the pressure is building towards a capitulation. In the liquidation vacuum, these large positions are most vulnerable. This indicates that the yellow metal continues to be more bearish.
