Investors turned their attention to the Federal Reserve for greater clarity on their rate-raising strategy. In addition, several central bank meetings will follow this week. Gold prices fell slightly on Monday ahead of the Fed rate decision. Analysts interpret the market and share their forecasts.
“This may force the Fed to keep its feet on the rate hike pedal”
Market participants expect a 25 basis point (bps) rate hike from the Federal Reserve at the end of its two-day policy meeting, January 31st – February 1st. The Fed rate decision will be announced on Wednesday at 22:00 CET. Spot gold was trading at $1,923.35, down 0.2% at press time. U.S. gold futures fell 0.3% to $1,922.90. Exinity chief market analyst Han Tan comments:
As markets eagerly await the Fed’s latest policy guidance, gold retreats from nine-month highs as the dollar and yields stabilize. However, if the US economic growth momentum continues defiantly in the face of demand-destroying rate hikes by the Fed, this may force policymakers to keep their feet on the rate hike pedal. Such extreme hawkish policy signals this week could loosen some of gold’s gains since the start of the year.
“There will be more demand for gold”
The expectation for a slowdown in Fed rate hikes came after economic data showed signs of cooling US inflation. Non-interest-paying gold tends to yield benefits when interest rates are low, as it reduces the opportunity cost of holding bullion. Investors are pricing in a 50bps rate hike by the Bank of England and the European Central Bank, which are holding policy meetings this week.
The Chinese Center for Disease Control and Prevention said in its latest weekly update that the current wave of Covid-19 infections in China, the largest consumer of bullion, is nearing its end and there has been no significant recovery in cases during the Lunar New Year holidays. Meanwhile, as China’s economy continues to open up, there will be more industrial and luxury demand for gold, says Clifford Bennett, chief economist at ACY Securities.
“Gold prices consolidate before Fed rate decision”
Tastylive global head of macro Ilya Spivak comments on the effects of the Fed rate decision and subsequent President Jerome Powell’s speech as follows:
Gold prices are currently consolidating in a range ahead of the Fed meeting. The main focus will be on the style Fed Chairman Jerome Powell will use in his speech.
Spot gold could break the $1,919 support and drop to the $1,883 to $1,905 range, according to Reuters technical analyst Wang Tao.
“Gold will pause in the short term and rise in the long term”
“Gold has performed well over the past few weeks, taking advantage of the decline in the US dollar,” says Colin Cieszynski, chief market strategist at SIA Wealth Management. Technically, gold looks a bit overbought and is expected to stall in the short term, especially with the Federal Reserve’s policy decision to be announced on Wednesday. However, the analyst states that the long-term chart continues to be bullish.
“Recent US PCE data confirms 25 bps for Fed rate decision”
Meanwhile, cryptocoin.comAs you follow on Friday, US PCE inflation figures came in line with most market expectations. US consumer prices rose just 0.1% in December, the smallest increase in 15 months. Annual rise in prices slowed to 5% in December, from 5.5% the previous month, and 7% last summer, a 40-year high. In the last 12 months, the increase in the core inflation rate slowed down from 4.7% to 4.4%. This is also the lowest level in 14 months.
In a market update, CMC Markets UK chief market analyst Michael Hewson says the drop to 4.4% year-on-year confirms a 25bps rate hike at the Fed’s meeting next week. “The Fed’s biggest challenge right now will be getting market expectations of rate cuts to recede,” Hewson says.
“Correction possible as gold failed to break this level”
Separately, US consumer sentiment rose to 64.9 at the end of January, according to the University of Michigan’s consumer attitudes indicator. This is higher than the initial data in January of 64.6. Economists surveyed by The Wall Street Journal had predicted an unchanged figure of 64.6.
Chintan Karnani, research director at Insignia Consultants, says that at the end of the day, the Fed can surprise the market, not just with interest rates, but with “small and meaningful changes to the economic and inflation outlook.” The analyst also notes that traders are standing on the sidelines before the FOMC in case there is a surprise. In this context, the analyst makes the following comment:
Gold has not yet broken the $2,000 level. Unless there is a convincing breakout at this level, there will likely be sharp corrections. Gold traders will look for clues to the interest rate pause in the FOMC to force $2,000.
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