Gold has lost $60 this week as markets prepare for an aggressive hike at the Fed’s July meeting. However, the yellow metal remains vulnerable to an even bigger drop. However, analysts are pointing to a potential price dip for the precious metal that will trigger a momentum spin.
“Gold stuck between inflation risks and recession concerns”
The gold market is suffering from a strong US dollar index taking most of the safe-haven interest amid rising recession fears. Standard Chartered precious metals analyst Suki Cooper comments:
Gold fell to levels last seen in September 2021. Also, it is technically trading in the oversold territory. Gold is stuck between rising inflation risks and growing concerns about a recession. Therefore, he turned to taking his cue from USD, which benefits from safe-haven flows rather than gold.
“Investors are investigating how high the Fed should go”
On top of that, Friday’s employment data beat expectations. The US economy added 372,000 job positions in June. The optimistic figure assured markets that the Fed will raise another 75 basis points at its July meeting in just over two weeks. The CME FedWatch Tool shows a 95.4% chance for a 75bps increase and a 4.6% chance for a 100bps increase in July.
Today’s report means the Fed still has a lot of work to do on policy rates to cool demand in the economy. At this point, it is possible to say that an interest rate increase of 75 basis points is almost certain. Charlie Ripley, senior investment strategist at Allianz Investment Management, said:
What matters to investors here is not how fast the Fed will raise interest rates, but how high they have to go to slow the economy.
Edward Moya: That’s the key level for gold!
Analysts see more downside risks for gold. He states that prices could test $1,700 and potentially even $1,650. However, OANDA senior market analyst Edward Moya told Kitco News that these lower prices will likely serve as the bottom as investors return to the metal from these levels. The analyst explains his views as follows:
When $1,800 was broken this week, the selling pressure was enormous. How much longer will we see? We’re still looking at a market where gold could be vulnerable to test $1,700. If things turn ugly, gold could be vulnerable between $1,650-$1,675. Because that’s where buyers will come back. Gold is vulnerable to this decline. That’s the key level. On the upside, gold is the key resistance level at $1,770.
“Gold has a safe-haven premium for now”
Suki Cooper watches $1,690. The analyst highlights this level as gold’s ‘weaker price floor’. He also describes July as a seasonally slow period for demand. Based on this, the analyst makes the following comment:
Gold has a safe-haven premium for now. However, it has eroded considerably. We expect gold to continue to take cues from macro drivers. Therefore, prices may test further bottoms later in the year. However, it is possible that concerns about inflation may limit the downward trend.
The Fed determines the price action of gold
According to analysts, the gold narrative primarily depends on how the market is pricing in Federal Reserve rate hikes. Edward Moya notes the following on the subject:
The first drop this week was a reaction to what was happening in the Treasury market as yields were tightened further and priced further by the Fed. We’re starting to see Wall Street approach full pricing in all of the Fed’s tightening.
“That’s when gold will stabilize”
But once the markets move beyond this Fed meeting in July, the macro environment will start looking for gold. Moya says next week’s US inflation report will help with that. According to the analyst, the expectation is that the inflation report will consolidate a 75 basis point increase later in the month. In this context, the analyst shares the following predictions:
And when that happens, gold will make a breakthrough with the massive weakness of Fed tightening expectations. A hiccup can be technical selling pressure. Therefore, it is important to watch what gold is doing at the $1,726 level. Once tightening is agreed upon and markets believe it is fully priced in, gold will stabilize.
next week’s data
A dataset to watch closely next week will be the June US annual inflation report. cryptocoin.comAs you follow, the market expects it to increase to 8.7% from 8.6% in May. Chris Weston, Pepperstone’s head of research, comments on inflation expectations as follows:
There are many signs that inflation has peaked. Unfortunately it won’t topple and the word ‘plateau’ is more appropriate. I see the market more sensitive to headline inflation. The risk is that it comes just above consensus. A large CPI figure solidifies expectations for a 75 basis point increase from the Fed at the July 27 FOMC meeting. The market is pricing this out hard, with another 50 basis points in September.
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