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Gold market is waiting for next week's Fed meeting - StoneX's O'Connell

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(Kitco News) -The gold market has been trapped in a three-week holding pattern and could continue to consolidate until next week's Federal Reserve monetary policy meeting, according to one market analyst.

The CME FedWatch Tool shows that markets see a more than 90% chance that the Federal Reserve will raise interest rates by another 50-basis points. The central bank has signaled that it could raise interest rates by 50-basis points at the next two meetings. Meanwhile, markets are pricing in three consecutive aggressive moves.

However, in her latest weekly analysis, Rhona O'Connell, Head of Market Analysis for EMEA and Asia at StoneX, said that gold investors should look past any potential knee-jerk reactions following next week's announcement and focus on the bigger picture.

Gold prices continue to trade around the $1,850 level. August gold futures last traded at $1,856.70 an ounce, up 0.25% on the day.

Even with the Federal Reserve's aggressive monetary policy stance, markets see interest rates hitting a high of 3.50% by the end of the year. However, inflation pressures will remain elevated.

"At present, U.S. two-year yields are 2.7%, while headline inflation is 8.2%, although there are still some dislocations to drop out of the year-on-year calculations. So, while the headlines about rate hikes are likely to generate knee-jerk reactions in the markets, the longer-term view should revolve around persistent negative real rates," said O'Connell.

Although markets continue to price in significant rate hikes during the summer, O'Connell noted that there is still a lot of uncertainty regarding how the central bank's plan to reduce its balance sheet will fit with current monetary policies.

Gold price remains chained to $1,850 as OECD lowers growth forecasts

This month Federal Reserve started to run down its balance by $47.5 billion. By September, it will begin reducing its balance sheet by $95 billion.

"Tightening gives a natural buoyancy to bond yields, and it is certainly possible that this could allow the Fed to be less aggressive in its interest rate hiking than the bond markets have been discounting," said  O'Connell. "So, the essential financial parameters remain supportive for gold, but the professional markets are still not committing in any size."

Ahead of the Federal Reserve's decision is Friday's Consumer Price Index report. Economists are expecting the data to show that inflation pressures have peaked. The question remains, though, as to how fast it will take for prices to cool down.

According to consensus forecasts, economists are expecting annual headline inflation to rise 8.2%, down slightly from the March peak at 8.5%. Annual core inflation, which strips out food and energy prices, is expected to increase 5.9%, down from 6.2% in April.

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