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Gold price going into Fed decision: selloff or test of $2k?

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(Kitco News) With Federal Reserve rate hike expectations see-sawing on mixed macro data, most analysts call for a pause in June but are not ruling out more rate hikes this summer. Here's what it means for gold.

The gold market is ending the week 0.4% higher after August Comex futures found solid support at the $1,960 an ounce level. However, analysts are less bullish on gold in the short term, citing risks of more Fed rate hikes and higher U.S. dollar weighing on the precious metal.

"Gold is vulnerable after trading in a fairly muted range," TD Securities senior commodity strategist Daniel Ghali told Kitco News. "All eyes are on the rate decision. And the outlook implied by the stamens of economic projections."

The Fed decision

The FOMC June 13-14 meeting is important because of the rate decision, the updated economic projections, and the new dot plot, which will give some idea about the Fed's reaction function over the next few months.

The Fed is expected to keep rates unchanged at 5.25% next week, letting the lag effects of monetary policy tightening from the last 15 months take effect. The CME FedWatch Tool is pricing in a 72% chance of a pause at the time of writing. If the Fed does pause, it would be the first 'on hold' decision since January 2022.

A pause would be bullish for the gold sector, OANDA senior market analyst Edward Moya told Kitco News.

"For gold, we are going to see more optimism that the Fed is done," Moya said. "The Fed seems likely to pause their tightening cycle, and if the updated forecasts remain optimistic that inflation will get a lot closer to target, it could be good news for gold bulls. Gold volatility should be elevated as prices could break out of the $1,950 to $2,000 trading range."

On the other hand, any hawkish surprise could mean a steep selloff for gold, Ghali noted. "Recent positioning raised implications of a surprise hike for next week. And a cohort of money managers might be vulnerable to that hike. A break below $1,940 an ounce would be significant."

Markets are referring to a potential pause in June as a "hawkish skip," citing the Bank of Canada's decision to pause for two consecutive meetings in the spring and then revert to another rate hike at the June meeting.

"We expect the Fed to leave interest rates unchanged at next week's FOMC meeting but, in what could be characterized as a 'hawkish skip,' to signal via forward guidance that officials are minded to hike interest rates again, probably at the following meeting in late-July," said Capital Economics chief North America economist Paul Ashworth. "The recent resilience of employment and stickiness of core inflation will ensure that the Fed delivers that rate hike as planned next month."

All eyes are on next week's inflation numbers

The big macro event everyone is keeping a close eye on is the U.S. May CPI report, which will be released on Tuesday — one day before the Fed's rate announcement.

And some analysts see the Fed decision as hinging on that inflation report.

"Should core inflation come in at 0.5% month-on-month – or 0.6% rather than the 0.4% consensus expectation – then the odds would likely swing in favor of a hike on Wednesday, as the measure would be heading in completely the wrong direction," said ING chief international economist James Knightley.

Gold price levels to watch

The gold market has formed a bottom at the $1,950 an ounce level, which serves as a solid support, RJO Futures senior market strategist Frank Cholly told Kitco News.

"A lot depends on the dollar right now," Cholly said. "Gold will need something above $2,000 for the August contract to give more confidence."

For the summer months, gold could be in store for a slow downward move as investor appetite lacks conviction during a seasonally slow period for consumption, said Standard Chartered precious metals analyst Suki Cooper.

"The gold market is caught within a comfortable range, and while tail risks exist that could push prices higher, risks through to year-end are increasingly to the downside," Cooper said Friday. "We believe the floor is well supported; in turn, prices are more likely to drift lower than plummet."

Standard Chartered is projecting gold to average at $1,975 an ounce in Q2 and $1,925 in Q3.

Next week's data

Tuesday: U.S. CPI

Wednesday: Fed rate decision, PPI,

Thursday: ECB rate decision, U.S. retail sales, Philly Fed manufacturing index, U.S. jobless claims, U.S. industrial production, NY Empire State manufacturing index,

Friday: Michigan consumer sentiment

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