(Kitco News) - The holiday season is quickly approaching, but before the celebrations begin, traders and investors will have to get through a barrage of central bank monetary policy meetings.
Currently, all the focus is on the Federal Reserve as it will release its monetary policy decision Wednesday. According to consensus forecasts, the Federal Reserve is expected to slow the pace of its rate hikes with a 50-basis point move, pushing the Fed Funds rate to between 4.25% and 4.50%.
However, commodity analysts have said that gold will be sensitive to the central bank's interest rate projections. In September, the bank saw interest rates peaking at 4.6%. The terminal rate is expected to move higher in this latest update.
Avery Shenfeld, senior economist at CIBC, said that he sees the Fed Fund rate now peaking at 5%. At the same time, Shenfeld warned that Federal Reserve Chair Jerome Powell, could also strike a hawkish tone.
"We could see Powell's press remarks emphasize that, counter to what markets are pricing in, the central bankers will need to maintain that tighter stance through 2023 for the slowdown in growth to open up enough slack to keep inflation grounded in 2024," he said.
For the gold market, some analysts have warned that a terminal rate above 5% could create some selling pressure in gold. However, a move to 5% would put it closer to market expectations. The CME FedWatch Tool shows markets see interest rates peaking between 5.00% and 5.25% in the first half of next year.
Although gold could see some selling pressure, some analysts have said that any drop could be a buying opportunity. Although the Federal Reserve has room to raise interest rates, economists note that they are closer to the end as recession fears grow.
"Chair Jerome Powell will seek to ensure the move isn't interpreted as a dovish 'pivot,' and the Fed's new projections may show a slightly higher peak in rates than before. But we continue to think a further sharp fall in inflation and economic weakness will convince the Fed to start cutting again before the end of next year," said Andrew Hunter, senior U.S. economist at Capital Economics.
Hunter added that he doesn't see interest rates peaking above 5%.
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BOE next at bat, followed by the ECB
Once the Fed meeting has concluded, the focus will quickly shift to across the Atlantic for the Bank of England's monetary policy decision Thursday.
Economists expect that the BOE will raise interest rates by 50 basis points to 3.50%. At the same time, markets see the central bank's terminal rate around 4.6%. Although the U.K. economy is expected to struggle through 2023, the significant fear and uncertainty from October's market routs has eased heading into the new year.
"As the dust settles on the U.K.'s political backdrop, the Bank of England can get back to its usual affairs, focusing on returning inflation to target. This should yield a slightly more predictable path for Bank Rate going forward, even if the MPC continues to shy away from any real guidance on where they see the terminal rate," said market analysts at T.D. Securities.
The final Group of Seven central bank to adjust its monetary policy is the European Central Bank.
The ECB is expected to raise interest rates by 50 basis points to 2.50% Thursday; at the same time, markets are pricing in a 20% chance of a 75-basis point move.
Aside from the Fed, the ECB's decision could impact gold prices. Analysts have said that there is a risk ECB President Christine Lagarde strikes a more hawkish tone than expected, which would weaken the U.S. dollar against the euro. A weaker U.S. dollar would support gold prices.
Economists note that the ECB could be more aggressive than the Federal Reserve because it only has one mandate: price stability. Although the ECB has room to move interest rates higher in 2023, many analysts see a peak at 3%.
"The swaps market is still pricing in a peak policy rate near 3.0%, down from 3.5-3.75% after the October decision," said currency analysts at Brown Brothers Harriman. "Of course, President Lagarde's press conference will be crucial and she is likely to signal another hike at the next meeting on February 2. That said, we think there is still room for ECB tightening expectations to fall further, and we stand by our call that the ECB will pivot and cut rates before the Fed does."
The sideshows
In other central bank moves next week, both the Swiss National Bank and Norway's central bank will also meet Thursday.
The SNB is expected to raise interest rates by 50 basis points to 1.0%.
The Norges Bank is expected to raise interest rates by 25 basis points to 2.75%.
