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James Hyerczyk
U.S. Dollar and Gold

Gold is trading at its lowest level since July 17 shortly before the regular session opening on Thursday. The move is follow-through selling related to yesterday’s steep reversal to the downside. The weakness is being fueled by slightly higher Treasury yields and a stronger U.S. Dollar. The catalyst behind the move are comments from Federal Reserve Chairman Jerome Powell that tempered the chances of a series of rate cuts later this year.

At 10:47 GMT, December Comex gold futures are trading $1419.40, down $18.40 or -1.29%.

Fed Recap

On Wednesday, Federal Reserve policymakers cut its benchmark interest rates 25-basis points as expected, but Powell dampened any thoughts of more aggressive action when he characterized the rate cut as “a mid-cycle adjustment to policy”, a sign to markets that further sharp cuts were not imminent.

Going into yesterday’s session, gold traders had begun pricing in additional rate cuts for September and December.

In response to Powell’s comments, Treasury yields whipsawed before the 2-year Treasury note yield rose and the 10-year Treasury note fell. That was enough to send the U.S. Dollar Index to a two-year high. When the dollar rises, foreign demand for dollar-denominated gold tends to drop. This is driving the price action early Thursday.


Daily Forecast

The Fed has spoken and traders are adjusting their gold positions to reflect the central bank decisions. Investors will have about six weeks to figure out the Fed’s next move since it doesn’t meet until September 18.

From now until September 18, gold traders will be paying close attention to the economic reports to see if the economy is weakening enough to encourage the Fed to make another rate cut in September. Traders should be paying particular attention to “global developments” and “muted inflation” since they were mentioned in the Fed’s monetary policy statement.

Remember that Powell said, “It’s not the beginning of a long series of rate cuts.”  He didn’t say it’s just one rate cut.” So if the economy continues to show signs of weakness, or if global economic weakness begins to weigh on U.S. growth then the Fed is likely to cut again.

I don’t expect a prolonged bear market to develop in gold, but I do think traders will shed positions until prices reach a value zone and the hedge and commodity funds rebuild long positions.

On the data front, traders will get the opportunity to react to the latest data on weekly jobless claims at 12:30 GMT.

At 14:00 GMT, reports on Construction Spending and the most important ISM Manufacturing PMI will be released. It is expected to come in at 52.0, up from 51.7. A lower than expected reading could underpin gold prices.

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