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(Kitco News) Gold's move has fizzled out after approaching $2,000 an ounce earlier this week on the idea that the Federal Reserve might be close to a peak in rates. And analysts are now gearing up to parse through the Federal Reserve Chair Jerome Powell's comments following a widely expected 25-basis-point hike on Wednesday.
The gold market was reacting to a firmer U.S. dollar after the Bank of Japan signaled that it looks to maintain its ultra-loose monetary policy next week and sees no urgency in adjusting its yield curve control program, said OANDA senior market analyst Edward Moya.
This was in contrast to the Federal Reserve's upcoming meeting Wednesday, during which a 25-basis-point hike is priced in at a nearly 100% chance, according to the CME FedWatch Tool.
"Gold prices are softening as the dollar firms up after reports that the BOJ is leaning towards leaving yield curve control strategy unchanged," Moya said. "The dollar is riding a small wave here, and that is putting gold's third weekly gain at risk."
There is also a risk of a deeper pullback in gold next week, but it largely depends on Powell's rhetoric.
"Gold traders have a lot of news to follow next week, and that could support a deeper pullback if the Fed keeps optionality for more tightening on the table and if earnings continue to mostly suggest the resilience of the U.S. economy remains," Moya added. "Before the central bank fireworks ignite next week, gold seems like it will consolidate between the $1,940 and $1,980 range."
At the time of writing, August Comex gold futures were trading at $1,964.30, down 0.33%.
Eyes on the Fed, the ECB, and the BOJ
Next week, markets will be digesting the Federal Reserve, the European Central Bank, and the Bank of Japan's monetary policy statements.
There was a lot of optimism this week that the Fed was close to being done with its tightening cycle despite Powell's promises of at least two more rate hikes this year.
"The Fed is almost certain to hike its policy rate by 25bp to between 5.25% and 5.50% at next week's FOMC meeting, but we increasingly believe that will prove to be the peak," said Capital Economics chief North America economist Paul Ashworth.
Behind this optimism was June's inflation data, which showed inflation sharply cooling in the U.S. The consumer price index rose 3% last month — the slowest pace in over two years. And the core CPI measure, which excludes volatile food and energy prices, was up 4.8%, marking the slowest advance since 2021.
"Despite the 'higher for longer' rhetoric from officials, a more marked decline in core inflation and easing in labor market conditions in the second half of this year will eventually persuade the Fed to pivot and cut rates aggressively next year," Ashworth noted Friday.
For next week's FOMC statement, analysts will pay close attention to any changes to the inflation narrative and how strongly the Fed maintains its tightening bias.
"In his press conference, Chair Jerome Powell may even go as far as to stress that additional rate hikes this year are still necessary," Ashworth said. "Markets are unconvinced, however, and broadly agree with our view that the Fed is almost done tightening."
Before the Fed can signal that it's done raising rates, there will be a period of uncertainty and data dependence, said TD Securities senior commodity strategist Ryan McKay. And for gold, it could mean a pause before the next move higher.
"Speculators have been unwilling to fully buy into the bullish gold narrative," McKay said Friday. "Indeed, discretionary traders and investors have thus far remained on the sidelines for now. But, this also offers the potential for additional upside should Fed expectations turn more dovish, and this cohort begins deploying their dry-powder."
The ECB is also expected to raise rates by 25 basis points on Thursday, with analysts paying close attention to ECB President Christine Lagarde's comments. Meanwhile, the BOJ is projected to keep rates steady and its yield curve control unchanged.
"It seems that while the BOJ stands pat, the other major central banks are tightening, and that should continue to drive that interest rate differential trade," Moya pointed out.
Data next week
Tuesday: U.S. CB consumer confidence
Wednesday: Fed decision, U.S. new home sales,
Thursday: ECB decision, U.S. jobless claims, U.S. durable goods orders, U.S. GDP Q2, U.S. pending home sales
Friday: BOJ decision, U.S. PCE Price Index
