 | Get all the essential market news and expert opinions in one place with our daily newsletter. Receive a comprehensive recap of the day's top stories directly to your inbox. Sign up here! |
(Kitco News) The inflation problem is not going away, with the Federal Reserve and the European Central Bank doubling down on their calls to keep raising rates amid promises of price stability. The gold market is not taking it well, with prices at risk of falling below $1,900 an ounce in the short term.
The latest macro data out of the U.S. supports more tightening by the Fed. The Conference Board's consumer confidence report surged to 109.7 in June – the best since January 2022. This has pushed recession calls further out, supporting another 25-basis-point hike by the Fed.
Other data included the U.S. durable goods rising more than expected and the new home sales soaring in May.
The CME FedWatch Tool now sees a 77% chance of a 25-bps rate hike in July. Morgan Stanley has also updated its forecast on Tuesday, jumping aboard the July rate hike train. "We now judge that the bar for a July hike is significantly lower than we had initially expected," economists said in a note.
In response, gold prices neared their lowest levels since March on Tuesday, with August Comex gold futures last trading at $1,923.90, down 0.51% on the day.
In Europe, ECB President Christine Lagarde warned that inflation is now in a new phase and could linger for some time, signaling more rate hikes to come.
"It is unlikely that in the near future the central bank will be able to state with full confidence that the peak rates have been reached," Lagarde said Tuesday during the ECB's annual monetary policy retreat in Sintra, Portugal. "Barring a material change to the outlook, we will continue to increase rates in July."
Market expectations see the ECB's rate peaking at 4%, which means a summer and a fall rate hike are likely.
Inflation remains a global problem despite more than a year of the most aggressive monetary policy tightening in decades.
Rising prices are one of the three biggest near-term economic concerns for 85% of central banks this year, according to the closely watched OMFIF's Global Public Investor 2023 survey released Tuesday. "Not a single respondent expects inflation to fall to target in major economies in the next 12-24 months."
The International Monetary Fund (IMF) also warned this week that markets are underpricing the effort required from central banks to tame inflation.
"Inflation is taking too long to get back to target," IMF's deputy managing director Gita Gopinath said at the same ECB event Monday. "While headline inflation has eased significantly, inflation in services has stayed high, and the date by when it is expected to return to target could slip further."
![Live 24 hours gold chart [Kitco Inc.]](/images/live/gold.gif?0.2924175530478188)
The gold market now braces for Fed Chair Jerome Powell's Sintra comments, scheduled for Wednesday.
"The expectations of further rate hikes, above all in the U.S., are likely to continue to dampen sentiment on the gold market," said Commerzbank analyst Thu Lan Nguyen. "This situation is unlikely to improve for the time being as during the central bank conference that is taking place in the Portuguese city of Sintra this week, the central bank governors (Powell speaking tomorrow) will probably continue to adopt more of a hawkish tone."
Given this environment, the gold market is at risk of falling below $1,900 an ounce, said OANDA senior market analyst Edward Moya.
"It has been pretty ugly for gold since early May, and if expectations grow for further Fed tightening, that could send gold tentatively below the $1,900 level," Moya said Tuesday.
From a technical perspective, gold's immediate support level is at $1,917 an ounce, said CompareBroker's chief analyst Dragostin Kozhuharov. "For a more significant move lower, a strong move below these two price levels needs to occur first," Kozhuharov said. "Then comes the $1,900 handle, and next support below that would be $1,877 and the 200-day moving average."
