(Kitco News) Precious metals subject to stronger US dollar and higher Treasury yields ahead of crucial interest rate decision by the Federal Reserve.
Some analysts fear the $1,600 level in securities as the Fed appears to remain hawkish despite some troubling economic signs.
Thirteen central banks are meeting this week, and most of them are expected to raise interest rates sharply, [but] The FOMC meeting is the highlight of the week, said Chris Weston, head of research at Pepperstone.
Markets are poised to comb through the rate hike decision, updated economic outlook, and language used by Federal Reserve Chairman Jerome Powell at the press conference following Wednesday’s announcement.
With less than 24 hours until the big event in September, gold’s position may continue to deteriorate despite the heavy losses it sustained last week. Comex’s December gold futures contract was trading at $1,674.10, after falling from last week’s high of $1,740 an ounce.
Here’s why the price of gold dropped to $1600 after that
It all comes down to whether the Fed lights up in the face of mounting fears of a recession and doubts about a soft landing, according to analysts. One such sign is the “extreme reversal (near 50 basis points) in the US Treasury curve 2-10,” Chris Turner, head of global markets at ING, described.
This is why the tone Powell chooses is so important. “Fed Chairman Powell’s messages are likely to determine whether gold has been squashed here. Gold will be in trouble if Powell is able to convince markets that they will not only remain aggressive with tightening, but will keep interest rates even as the economic downturn worsens.” , said Edward Moya, senior market analyst at OANDA.
The dominant trend weighing on gold was expectations of a massive rise of 75 basis points on Wednesday, another 75 basis points at the November meeting, and 50 basis points at the December meeting.
“The Fed has made it clear that it tends to do too much tightening rather than too little. With inflation stubbornly rising, interest rate increases will be severe,” said Daniel Haynes, chief commodity strategist at ANZ. “The precious metal remains vulnerable to further bearish moves amid a challenging macro backdrop. Expectations for another rate hike are likely to keep the dollar strong.”
At the end of the day, the US dollar is the big winner, which is what makes this environment very challenging for gold.
“We now believe that the strength of the US dollar will last longer than we thought. The flexibility of action means that the Fed will have to raise more than the market expects. Deteriorating liquidity conditions and higher US yields will fuel safe haven flows and add a risk premium,” explained Haynes. “Europe is facing a serious energy crisis, which represents headwinds for the euro and support for the US dollar. This makes us believe that the US dollar will peak in the first quarter of 2023. In the face of continued dollar strength, we see gold continue to perform poorly.”
In the short term, the risk for gold is a drop to $1,600 an ounce as the demand for the precious metal continues to dwindle.
Haynes noted, “Demand for havens remains weak despite increased geopolitical risks and a deteriorating economic background. Technically, the downtrend is likely to continue. A break below $1,675 an ounce indicates that the price could decline.” to $1,600/oz.
Moya added that fluctuations in gold are not going anywhere. “Price is likely to have a strong case to either move towards $1,600 or above the $1,700 level,” he said.
And although most economists expect the Fed to raise rates by 75 basis points on Wednesday, there is still a 16% chance of a full percentage point increase, according to the CME FedWatch Tool.
“While prices are certainly weak, precious metals price action could still fall further as the restrictive price regime is set to last longer. In fact, gold and silver prices tend to show regular underperformance when markets anticipate the true level,” he said. Commodity analysts at TD Securities say the Fed funds rate will rise above the neutral rate.
What to expect from the Fed regardless of aggressive rate hike
Another key element of the Fed’s monetary policy meeting is the updated economic outlook and the dot plot, which could reveal new information about when the Fed’s lifting cycle may stop or even end.
“The swaps market started pricing at a final rate of 4.75% over the next 12 months, rising sharply in recent days and making new highs for this cycle. In fact, we expect a hawkish shift in Dot Plots, with the expected policy rate rising to 4.0% in 2022 and to 4.25-4.5% in 2023 “For 2024, the projected rate is likely to remain constant in order to ensure that no pivots of any kind are expected, at least for the time being.”
On the economic front, analysts expect the Fed to cut growth estimates and raise inflation expectations.
“It wouldn’t be surprising at all to see core inflation expectations for PCE rise for 2022 from 4.3% to 4.5%, but will there be any change in the call to 2.7% for 2023?” Weston asked. “In June, the Fed projected 1.7% GDP for both 2022 and 2023 — we should see 2022 GDP forecasts halved, but are we going to see 1.7% GDP forecasts for 2023 revised downward? ?”
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