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Is hawkish sentiment about to peak? Here's what is next for gold price after this week's Fed-related selloff

Kitco News

(Kitco News) After shedding more than $35 this week in response to a more aggressive Federal Reserve meeting minutes, the hawkish sentiment might be at its peak, according to analysts. And that is a positive signal that gold bulls are keeping a close eye on.

The big news that shook the gold market this week was the Fed's December meeting minutes, which indicated that a "tight" U.S. labor market and problematic inflation could require quicker rate hikes and a balance sheet reduction.

"Participants generally noted that, given their individual outlooks for the economy, the labor market, and inflation, it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated," the minutes stated. "Some participants also noted that it could be appropriate to begin to reduce the size of the Federal Reserve's balance sheet relatively soon after beginning to raise the federal funds rate."

Analysts pointed out that this view might already be dated, considering the surge in omicron-related cases in December and January.

"Omicron is having an impact. We are already starting to see that in the employment data," TD Securities head of global strategy Bart Melek told Kitco News.

The U.S. nonfarm payrolls rose only by 199,000 in December, well short of consensus estimates of 400,000. The November data was revised up to 249,000 positions added. Meanwhile, the U.S. unemployment rate dropped to 3.9%, beating market consensus calls for a decline to 4.1%.

"Today was a big disappointment. But despite weak employment, the relative consensus is that there are still inflationary pressures out there. Gold can still get a bit of a rally in Q1, another $40-$50. But afterward, gold is likely to slide lower," Melek said. "There is no guarantee that the Fed will get restrictive. The market believes the Fed will act robustly, but I am not so sure they will be able to."

In light of the changes in the macro data and the omicron situation, this week might have marked a peak in how hawkish the Fed is being perceived, Blue Line Futures chief market strategist Phillip Streible told Kitco News.

"Gold will recover from this the selloff. We are using this correction to buy gold again. Right now, it is trading in the lower part of its range. It is worthwhile to step in at these price levels. But we still don't have a big catalyst to take gold significantly higher. We are at peak hawkishness, though," Blue Line Futures chief market strategist Phillip Streible told Kitco News.

The question markets will be preoccupied with going forwards is how many rate hikes can the Fed commit to in 2022?

"Wall Street is now struggling to find out what will end up being the neutral rate. A few rate hikes are already priced in for 2022, but the question everyone has is, will some of the balance sheet runoff end up replacing some of the future rate hikes," said OANDA senior market analyst Edward Moya. "Gold had a bad week, but it could have been much worse when you consider the 10-year Treasury yield went from 1.53% to 1.75%."

Moya sees $1,770 an ounce as a good support level for gold next week. At the time of writing, February Comex gold futures were trading at $1,796.90, up 0.43% on the day.

Longer-term drivers are still supportive of higher gold prices, noted Gainesville Coins precious metals expert Everett Millman.

"Even if interest rates rise, high inflation still means that real rates are negative. That is positive for gold," said Millman. "Also, in the last two rate hike cycles, gold performed very well at the beginning of those hikes. We could see a replay of that when the Fed starts hiking rates later this year. It should push gold closer to $1,900."

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Data to watch

Next week, one of the macro releases to pay close attention will be the latest U.S. inflation number, scheduled to be published on Wednesday. Market consensus calls are projecting that the consumer price index will rise to 7% on an annual basis in December.

"Next week's numbers are set to show headline CPI breaking above 7% year-on-year- fast approaching a 40-year high – with the core rate rising well above 5% YoY. This will only intensify the pressure on the Fed to start hiking rates," said ING chief international economist James Knightley.

Also, the U.S. PPI and jobless claims, scheduled for Thursday, as well as Friday's U.S. retail sales, will be key.

Markets will also be zeroing in on Fed Chair Jerome Powell's nomination hearing before the U.S. Senate Committee on Banking, Housing, and Urban Affairs. The testimony is scheduled for Tuesday.

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