Can Powell 'Out-Dove' The Market? Gold Eyeing Presser As Fed's 25bp Cut Is 'A Done Deal' — Analysts
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(Kitco News) - The biggest market mover after the Federal Reserve rate decision on Wednesday is likely to come from Jerome Powell’s press conference as investors are expected to rummage through the chair’s comments for clues on future policy easing, according to analysts.
“Given the dovish signaling from officials, the weakness in forward-looking indicators (particularly for manufacturing), and the persistence of downside risks to the outlook, we think a 25bp cut is a done deal,” said ABN AMRO senior economist Bill Diviney, adding that the 50-basis point cut was looking unlikely at this point.
The CME FedWatch Tool is currently pricing in a 77% chance of a 25bp rate cut and a 23% chance of a 50bp rate cut.
With one rate cut almost certainly secured for Wednesday, the market is shifting its attention to Powell’s comments that will follow Fed’s announcement.
“The question, therefore, will be to what extent the Fed signals additional easing steps beyond what was signaled in June. With no update to the Committee’s projections at this meeting, it will be up to Chair Powell to steer market expectations via the press conference,” Diviney said.
Expectations are that Powell will sound quite dovish, considering that it will be the first rate cut since the financial crisis, explained Diviney.
“We expect the emphasis to remain on the downside risks to the outlook, but reference will also be made to muted inflation and the possible de-anchoring of expectations, as well as the weakening in business confidence,” he noted. “[But], he will struggle to ‘out-dove’ the market at this stage given what is already priced in (a further 65bp in cuts beyond the expected 25bp July move).”
ABN AMRO projected another two 25bp cuts by the first quarter of next year following the July cut.
What matters the most is whether the central bank is embarking on a significant easing cycle or just a couple of rate cuts, CIBC Capital Markets chief economist Avery Shenfeld told Kitco News on Friday.
“The fact that overall the U.S. economy is not dropping off a cliff is consistent with our view that we are only looking for a quarter-point cut now, another quarter-point cut before the end of the year, and then the Fed going on hold in 2020,” said Shenfeld. “For the Fed to continue on cutting into 2020, you’ll have to have the economy remain very slugging next year.”
In case of a 25-basis point cut, gold is likely to consolidate but hold above the $1,400 an ounce, according to TD Securities.
“[The metal] might go a little bit lower because there is still a portion of the market that is expecting a 50-basis point cut next week. Ultimately, we’ll get a 25-point cut and we’ll [see] a bit of a re-pricing lower in gold,” said TD Securities commodity strategist Ryan McKay.
In case the Fed surprises the markets with a 50-point cut, gold is likely to rally to fresh multi-year highs, said LaSalle Futures Group senior market strategist Charlie Nedoss.
“If the Fed does a 50-point cut, we would come back up and test those recent highs $1,454-40,” Nedoss pointed out.
DailyFX currency strategist David Song said he expects to see “topside targets” engaged ahead of the Fed meeting.
“In turn, the Fed’s forward guidance for monetary policy is likely to impact the near-term outlook for gold, but the threat of a policy error may push investors to hedge against fiat currencies as there appears to be a flight to safety,” Song wrote in a post on Tuesday. “Gold prices may exhibit a more bullish behavior over the coming days, and the precious metal looks poised to extend the advance from the monthly-low ($1382) as it breaks out of a holding pattern.”
Topside targets Song is looking at include $1,444 and $1,448 an ounce.
At the time of writing, August Comex gold futures were trading near-daily highs at 1,428.90, up 0.60% on the day.