The gold market is ending its five-week streak of losses. While the sentiment seems to be changing, some analysts say the precious metal still faces a challenging environment next week. August gold futures plans to close the week with more than 1% gains. It is trading at $1,721.40 an ounce in recent trading. Here are the details…
What happened in the gold markets?
All eyes will be on the US Federal Reserve (FED) next week, as markets expect the US central bank to raise interest rates by another 75 basis points. Some currency analysts said that while the US dollar fell from its highest level in the last 20 years, the aggressive stance of the FED will continue to support the dollar. “Amid a hawkish Fed and slowing global growth, we think the dollar will resume its broad-based strength before long,” economists at Capital Economics said in a report Friday.
Marc Chandler, managing director of Bannockburn Global Forex, said that while gold prices are likely to move higher next week, the central bank’s decision could limit gains. Marc Chandler used the following statements:
The Fed will likely not only raise 75 basis points, but will also signal that the adjustment is not over. I imagine gold will struggle around $1750 with the 20-day moving average just above that ($1,752).
What affects the Fed’s tightening cycle?
However, some analysts think the Fed’s tightening cycle has less of an impact on the US dollar and financial markets. Currency analysts at TD Securities view Wednesday’s decision as more neutral for the dollar as the market is hawking too much. Faced with growing recession concerns, some analysts said the FED could be closer to the end of its tightening cycle, which would be all bullish for gold. Edward Moya, senior market analyst at OANDA, used the following statements:
Gold prices are rising as fears of a global recession reset expectations of rate hikes for all major central banks. Gold is starting to act as a safe haven as weakened economic growth will force many central banks to abandon their aggressive tightening plans. Gold might find resistance at the $1,750 level. But if he can’t find it, not much will be up to the $1,800 level.
On Friday, preliminary data from S&P Global Market Intelligence showed activity in the US manufacturing and services sectors fell to a two-year low. The decline in activity reflected a similar weakness in Europe. Adam Button, chief currency strategist at Forexlive.com, said:
The market feels that the rate hike cycle will end sooner due to rapidly slowing growth. Friday’s US services PMI was shockingly soft, meaning the Fed will stall around 3% and possibly cut in 2023. When these discounts really appear, gold will rise due to the weakness of the USD.
US recession prospects
On Thursday, markets will anxiously wait to see if the US has slipped into a technical recession after the first data on second-quarter GDP is released. Many economists dismissed the weakness in the first quarter as a trade imbalance. However, data from the Atlanta Federal Reserve shows that GDP contracted 1.6 percent, in line with the first quarter decline. The traditional definition of a recession is two-quarters declines in succession. Last week, Bank of America said they are seeing the US enter a mild recession by the end of the year.
Another European crisis
Alongside the Central Bank’s monetary policy decision, analysts said they would also monitor the ongoing geopolitical uncertainty in Europe. He fell into political turmoil on Thursday after Italian Prime Minister Mario Draghi resigned following the collapse of his government of national unity. The country is expected to hold early elections in the fall. At the same time, economists continue to digest the European Central Bank’s announcement on the Transmission Protection Instrument. The program will be used to buy bonds from eurozone members to make sure all yields are aligned and avoid any risk of fragmentation.
Europe could be close to a sovereign debt crisis as the central bank continues to expand its balance sheet, said John Hathaway, Sprott Hathaway Special Situations Strategy Portfolio Manager. Christopher Vecchio, senior market analyst at DailyFX.com, said he sees a growing risk of a sovereign debt crisis in Europe as well. He added that both gold and the US dollar would benefit in this environment. “As long as there are concerns about the euro, there is room for gold. The US dollar is both in an upward trend,” he said.
Data to monitor
Other economic data economists will watch next week include consumer confidence, pending home sales and personal income and spending data from the US Conference Board.
- Tuesday: Consumer Confidence, New Home Sales,
- Wednesday: Durable Goods Orders, Pending Home Sales, FOMC decision and statement
- Thursday: Q2 GDP, Weekly Unemployment Claims
- Friday: Personal Consumption, Per capita Income, PCE Inflation
