Markets focused on the Federal Reserve meeting minutes and the US jobs report. In this environment, the US dollar index (DXY) rose to 20-year highs. Gold fell $35 on Tuesday, while the precious metals market turned red. The shiny metal is still in the red zone today. Analysts interpret the market and share their expectations.
“Strengthened dollar caused the price of gold to fall”
Gold saw a sharp sell-off after dipping below $1,800. August gold futures were down $35 on the day to $1,766.50. Commerzbank analyst Carsten Fritsch comments:
The US dollar caused the gold price to drop further. As a result, it dropped significantly below $1,800.
Markets await clues in FOMC minutes
The US dollar index climbed to 106.66 on Tuesday, hitting a 20-year high once again. The dollar also traded at a 20-year high against the euro. cryptocoin.comAs you can see on , the Fed has taken a very aggressive tightening path to contain inflation. After that, investors flock to the US dollar as a safe-haven currency.
All eyes are on the FOMC minutes of the June meeting. Markets are waiting for clues about the upcoming rate hike path and new recession comments from Fed members. The minutes are scheduled to be published today. ING FX strategists make the following statement:
Markets fully priced in with a 75 basis point rate hike later this month. The June FOMC minutes could tip the balance to the markets should there be any signs of growing consensus at the June meeting.
What changes the Fed’s hawkish view?
The CME FedWatch Tool gives an 85.6% chance of a 75bps increase and only a 14.4% chance of a 50bps increase at the July meeting. It looks like the US dollar will continue to hold its strength with another 75 basis points on the table. The only things that could change this hawkish view would be the corresponding jobs report for June (released on Friday) or slowing inflation data. James Knightley, ING’s chief international economist, said:
The Fed has made it clear that it is resolutely focused on controlling inflation. So we’ll either have to see a very weak jobs report released on July 8, or we’ll have to go out with a surprise drop in inflation. But most likely the second case applies. July 13 reflects declines across a wide range of categories.
“It is possible to form a continuous downtrend in the price of gold”
Gold will continue to watch and react to the US dollar. However, a break below $1,780 would put gold in a dangerous zone. This range means that gold will succumb to the weight of the most hawkish central bank regime since the 1980s. Bart Melek, head of global commodity strategy at TD Securities, comments:
This scenario suggests that if the broad CTA selling program triggers a breakout in prices, a sustained downtrend could form in gold. After all, as central banks face a credibility crisis, they may stick to their battle against inflation. Otherwise, it is possible to keep the interest rates higher for longer than the recession possibilities would imply.
Also, according to Bart Melek, the precious metal seeks support below $1,800. Therefore, the underlying trend continues to be down.
“High prices are likely to put pressure on gold demand”
From a physical standpoint, India has increased its basic import duty on gold from 7.5% to 12.5%. Therefore, demand for gold is likely to face some hurdles. Warren Patterson, ING’s head of commodity strategy, warns about this:
The Indian Rupee fell to a record low against the US Dollar to control the outflow of foreign currency. India is a major gold importer with imports of around 107 tons in May. Higher prices in the domestic market are likely to put pressure on gold demand in the short term. Especially when higher interest rates have already increased the relative cost of buying and holding gold.
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