What is in store for the price of gold as the Fed remains laser-focused on inflation and its massive spikes?

(Kitco News) The gold market will be wrapped up in the Federal Reserve’s interest rate decision next week as analysts see the US central bank ignoring the sharp drop in US Q1 GDP data and remaining focused on fighting inflation.

Gold is looking to end April down 1.7% for the month despite Friday’s gains. The June Comex gold futures contract was trading at $1,912.20, up $21 on the day.

“April has been a terrible month for gold. Many traders were surprised by another strong move in the US dollar. Dollar strength was driven by safe-haven flows due to concerns about the economic slowdown across Europe, China’s COVID-free strategy, and expectations of an Market on OANDA, for Kitco News:

The Federal Reserve is due to make its rate decision on Wednesday, and has confined itself to the rate-raising cycle for the next three meetings. “The market has approximately 250 basis points of rate hikes priced in over the next 12 months,” Moya said.

The biggest surprise this week was the US economy contracted by 1.4% in the first quarter. But the Fed is likely to exceed that negative number because the outlook for the second quarter looks better, according to analysts.

“You have to look at why the economy has contracted. Consumer was still strong, consumption was still fairly strong. But imports were one of the main reasons for that. They over-delivered when you consider exports were weak. Much of Moya explained that Traders ignored the data a bit.

Federal Reserve Chairman Jerome Powell will remain focused on inflation, which is difficult to control, especially given the type of price pressures the United States is experiencing, CIBC World Markets chief economist Avery Shenfield noted.

“Some point to the fact that the Fed has never had a sharp slowdown in inflation because it aims to generate without causing a recession,” Shenfield said. “That’s really not our central concern because we haven’t really had that kind of inflation in the past… The problem is that just as sharp price hikes like that this year have made the inflation problem look worse, next year’s downturn will underestimate the price index Consumers the real trend. It will be easier to cut inflation than keep it that way unless we slow down the pace of hiring and prevent further tightening in the labor market.”

Here’s what to expect from the Fed

The two main things the markets expect to see next week are a 50bps rate hike and the start of quantitative tightening.

“We suspect that the unexpected 1.4% annual decline in first-quarter GDP will stop the Fed from raising its policy rate by 50 basis points next week or from triggering quantitative tightening. The Fed will emphasize the continued strength of employment growth, and the temporary impact The Omicron wave, and the rebound in the growth rate of final sales to domestic private buyers, which is arguably a better measure of core demand.But the bottom line is that with inflation rampant, it has no choice, North America Chief Economist Paul Ashworth said: “Policy should tighten quickly.” regardless of the costs to the real economy.

The minutes of the last FOMC meeting suggested that “participants generally agreed that a monthly ceiling of $60 billion for Treasury securities and about $35 billion for MBS would likely be appropriate.”

Strategists at ING said they expect the Fed to start with $50 billion “to be allowed to flow each month before it gets as much as $95 billion by September.”

Looking ahead, the Fed is unlikely to get bolder and talk about raising rates by 75 basis points, said ING chief international economist James Knightley, citing the weak GDP figure. “For now, our base case remains that the Fed will continue next week’s 50 basis point rise with 50 basis point increases in June and July before shifting to 25 basis points as quantitative tightening accelerates. We see the Fed funds rate peaking at 3% in early 2023, Knightley explained.

What gold price are you looking for from the Fed

Moya said the gold market is looking to the Federal Reserve for signs of optimism. “Is inflation peaking? You’re likely to see many traders focus very much on that,” he said.

Moya noted that the latest core PCE price index data published on Friday indicates that core inflation peaked at 5.2% annually in March, after 5.3% in February. “This is very important,” he said. “It’s the first time we’ve seen a decline since October 2020. That might help the argument that the Fed might develop a soft landing and not be aggressive once we get past largely adjusted interest rate increases,” he said. .

Moya added that after the Fed meeting, gold could start to benefit from some safe haven flows, especially if the uncertainty in the stock markets continues.

The $1,875 level remains a good support for gold in the short term. On the upside, Moya is watching $1,940 an ounce. He said, “If we break $1,875 on the downside, gold could drop to $1,830. But this is the level where many technical traders become bullish. That is when you see gold testing the 200-day moving average.”

It’s only a matter of time before gold can break through its psychologically critical level of $2,000 an ounce, said Mike McGlone, chief commodity strategist at Bloomberg Intelligence. The main driver is likely to be the Fed showing some reluctance in the face of promised strong interest rate increases.

“The base now appears to be closer to $1800, and $2000 is a major resistance. We expect it is just a matter of time for gold to break above that limit. The biggest potential catalyst is lower Fed rate hike expectations, which may not be the case,” McGlone said. : “Even a further downturn is happening in the stock market, with the S&P 500 dropping about 10% in 2022 to April 28, and it looks like not enough.” “When the Fed Funds futures begin to anticipate the end of the rate-raising cycle, it should break through The precious metal is resistant to $2000 an ounce.”

Data to watch next week

Monday: ISM Manufacturing PMI
Tuesday: Factory orders
Wednesday: Fed rate decision, ADP non-farm employment change, ISM non-manufacturing PMI
Thursday: Bank of England interest rate decision, US initial jobless claims
Friday: US non-farm payrolls

Not giving an opinion: The opinions expressed in this article are those of the author and may not reflect the views of Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; However, Kitco Metals Inc. cannot. Nor does the author guarantee this accuracy. This article is for informational purposes only. It is not a solicitation to conduct any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. does not accept The author of this article will be liable for losses and/or damages arising from the use of this publication.

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