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Gold could benefit if Fed only raises interest rates by 50 bps; markets see nearly 100% chance of 75 bps move

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(Kitco News) - It took only a few days for markets to completely price in a 75-basis point hike and that could be good for gold, according to one international bank.

According to the CME's FedWatch Tool markets see nearly a 100% chance that the Federal Reserve will raise interest rates by 75 basis points later this afternoon.

Markets turned significantly hawkish Monday and Tuesday as investors continued to digest last week's inflation data, which hit a new 40-year high at 8.6%.

However, according to some analysts, gold's technical bounce from Tuesday's low could be a sign that some investors are starting to question market expectations.

August gold futures are holding near session highs last trading at $1,830.60 an ounce, up almost 1% on the day.

In a research note published Wednesday, Daniel Briesemann, Precious Metals Analyst at Commerzbank said that because market expectations are so high, gold prices could regain its recent losses if the U.S. central bank sticks to its forward guidance and raises interest rates by 50 basis points.

"If the Fed were to raise interest rates by 'only' 50 basis points today, this could be viewed as disappointing. In this case, some of the movements seen over the last few days could be reversed, i.e. yields could fall, the US dollar could weaken and gold could gain," he said.

While gold could see bounce following a disappointing central bank statement, Briesemann said that the precious metal's fate ultimately lies with Federal Reserve Chair Jerome Powell.

"If he sounds very hawkish and raises the prospect of bigger rate increases – contrary to his previous remarks – we believe that the gains that gold might potentially make would be limited, or that the gold price could continue its downswing," said Briesemann.

However, some analysts said that it is unlikely the Fed will disappoint market expectations as inflation fears continue to rise.

TD Securities sees gold falling lower; markets price in 75 bps move in September

"If the Fed surprises with a 50bp hike, the market will certainly rebound on relief. But the Fed's primary goal is to tame inflation right now, and not to boost the equity markets. And depressed market conditions seem necessary in achieving that goal," said Ipek Ozkardeskaya, Senior Analyst at Swissquote Bank.

Ahead of the Federal Reserve's announcement, the U.S. Commerce Department reported weaker than expected retail sales. Economists said that inflation is starting to have a major impact on consumption.

Economists have said that they don't expect the disappointing economic data will deter the U.S. central bank from meeting the market's aggressive expectations.

"Retail sales took a step back in the US in May, showing that elevated prices are starting to meet consumer resistance," said Katherine Judge, senior economist at CIBC. "And while it's only one month, this is a sign that higher prices are starting to thwart consumer demand, which could be key to dampening inflation in the future, along with interest rate hikes. Odds are that this isn't enough to deter the Fed from a 75bps hike today."

Looking at the gold market, commodity analysts have warned that if the Fed does follow through with a 75-basis point move, prices could drop below $1,800 an ounce.

However, analysts also note that gold still remains in a healthy long-term uptrend and even as the Federal Reserve is looking to aggressively raise interest rates, they are not going to risk pushing the economy into a recession.

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