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Gold could see a relief rally if Fed raises rates by 75 basis points - Standard Chartered

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(Kitco News) -The gold market is holding its ground above $1,700 an ounce ahead of the Federal Reserve's monetary policy decision this week. While the precious metal has been resilient in the face of challenging headwinds, one market analyst sees the potential for further downside in the long term.

Suki Cooper, precious metals analyst at Standard Chartered, said in a report published Friday, that although gold has struggled in recent weeks, the price action has been encouraging in what is traditionally a seasonally slow period for the precious metal.

She added that gold prices could have room to move higher in the near term following the Federal Reserve's monetary policy decision. Markets are currently expecting to see a 75-basis point hike on Wednesday. The CME's FedWatch Tool shows a 24% chance of a 100-basis point move.

"Given how far gold prices have fallen in recent sessions, we believe the gold market is also pricing in a 75bps hike at the July meeting and that a 100bps hike would come as a surprise and pressure prices below the key level of USD 1,690/oz. If prices were to breach this level, gold would be exposed to significant downside, whereas a 75bps hike may see a relief rally in gold," she said.

However, Cooper added that although gold prices could rise this week, she is not ready to sound the all-clear. She said that further aggressive rate hikes through the rest of the year will continue to support the U.S. dollar and weigh on gold.

The bank looks for gold prices to average around $1,700 an ounce by the end of the year.

Will gold survive another 75 basis point hike

"Gold has remained resilient given USD strength and has shifted to primarily taking its cue from the USD. We expect EURUSD to trade below parity in Q3-2022 and Q4, suggesting that gold is likely to struggle to gain meaningful traction," she said.

Despite long-term challenges, Cooper also said that a potential global recession remains a significant wildcard for the precious metal. Standard Chartered looks for U.S. economic growth to contract in the fourth quarter. Cooper said that persistently high inflation coupled with lower growth would support gold prices, even in the face of rising interest rates.

"Gold's price response during a U.S. recession is typically not one-way, but on average, prices have gained 15% on an annualised basis during the past seven recessions," she said.

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