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Fed pause in June does not mean rate hikes are over, and gold price is taking a hit - analysts

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(Kitco News) With the debt-limit deal clearing Congress and the latest employment report coming in strong, the gold market is not ruling out another rate hike this summer despite a potential pause by the Federal Reserve in June, according to analysts.

The debt ceiling standoff ended before causing too much damage, with the House and Senate passing the deal with comfortable majorities.

And Friday's resilient jobs data from April delayed looming recession calls, which gives the Fed room to keep rates higher for longer.

Analysts are still looking for the Fed to pause its rate-hike cycle at the June 13-14 meeting due to a few dovish Fed speakers this week. But another rate increase later this summer is not ruled out.

"The debt ceiling drama got resolved," Walsh Trading co-director Sean Lusk told Kitco News. "And the job numbers tell us that things are a bit better, which can be seen as inflationary. It keeps the Fed more hawkish."

The good news is that the Fed would not want to shock the markets, Gainesville Coins precious metals expert Everett Millman told Kitco News.

"There is an argument to be made that the Fed should continue hiking with economic data strong. But with lingering problems in financial systems, I don't see why it would hike and surprise markets," he said. "Up to now, the Fed tried to soften the blow of its rate hikes with clear signals."

According to the CME FedWatch Tool, markets are pricing in a 70% chance of a rate pause at the June meeting.

Markets will be keeping a close eye on the May inflation report, which will be released on June 13 - right before the Fed's rate decision.

"The outlook for the Fed is that it will stay higher for longer,"'s senior technical strategist Michael Boutros told Kitco News. "Even if the Fed skips in June. Another 25 bps is still baked in."

It is prudent for the Fed to pause, but one more rate hike isn't off the table at a later date, Boutros stated.

What does this mean for gold?

The gold market is at risk of another move lower before the bullish trend can resume, analysts said.

"The technical structure would suggest a bit more upside in the near term," said Boutros. "Still, I want to look for one more low. Near term, there is a risk of a pullback to a deeper correction — the $1,926-$1,881 area."

The more immediate support level for gold is the $1,950-80 range. "Gold will continue to trade sideways in this narrow range," said Millman. "The $1,925 is an important support. And $1,980-$2,000 is resistance."

Lusk is watching the $1,940-50 level on the downside, citing the risk of strong equity performance and a higher U.S. dollar.

At the time of writing, August Comex gold futures were trading at $1,969.50, down 1.30% on the day.

Macro perspective

Analysts are encouraged by the fact that gold is trading above the $1,970 an ounce level despite some of the more significant risks dissipating.

"Gold's price levels are encouraging. Many factors that normally drive gold higher are out of the way. At the same time, we've seen the dollar and yields rise somewhat. Those are headwinds for gold," Millman said. "I wouldn't say gold is overbought."

The underlying move towards safety in this environment is keeping gold at the upper $1,900s range, added Boutros.

"There is still all this talk about recession," he said. "As confidence in fiat currencies erodes, people return to the classic investment playbook, and gold is a part of that."

Data next week

Data-wise, it will be a quiet week, with markets looking toward the June 13 inflation report as a significant market mover.

"With the Fed entering its quiet period ahead of the decision, there will be no officials discussing the outlook for monetary policy over the coming week," said ING's chief international economist James Knightley. "[Next week's releases] are not going to move markets much given the importance of CPI the following week."

Monday: ISM non-manufacturing PMI

Wednesday: Bank of Canada rate decision

Thursday: U.S. jobless claims

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