Price of Gold Fundamental Weekly Forecast – Price Action Driven by Uncertainty Over Future Fed Rate Cut

Unless Treasury yields plunge as well as the U.S. Dollar, gold’s upside is likely to be limited. There is room to rally due to short covering and position-squaring, but with the Fed set on hold rates steady at this time and other central banks like the Reserve Bank of Australia and the Reserve Bank of New Zealand ready to cut rates, demand for gold is likely to be subdued.
James Hyerczyk
Gold and US Dollar

Gold futures finished the week lower but managed to retake some of the week’s earlier losses with a strong performance on Friday. Short-term, the factors influencing prices were primarily U.S. Treasury yields and the U.S. Dollar. Demand for higher yielding stocks indexes had little effect on prices. Longer-term traders were influenced by whether the Fed would lower rates later in the year.

Last week, June Comex gold futures settled at $1281.30, down $7.50 or -0.58%. Early in the week, the market touched a nearly five-month low at $1267.30.

Fed Pushes Prices Lower

Gold fell after the U.S. Federal Reserve interest rate and monetary policy decision on May 1. Many gold traders went into Fed Day positioned for the Federal Open Market Committee to be a little bit more dovish than it actually was. Central bank policy makers voted to leave its benchmark interest rate and monetary policy unchanged. Furthermore, Fed members dimmed any hopes for a rate cut in the near-term, driving up Treasury yields and the U.S. Dollar. This dampened demand for dollar-denominated gold.

What really surprised traders was that the Fed indicated that it saw no compelling reason to consider a rate cut any time soon, citing rising employment and economic growth.

Federal Reserve Chairman Jerome Powell’s post-meeting comments on May 1 showed he viewed the tepid inflationary readings as transitory factors. This led traders to trim bets that the Fed would cut rates this year and stimulate inflation, which ended up driving down demand for gold.

“Inflation month-to-month, quarter-to-quarter will always be moving around, there will always be factors hitting it,” Powell told reporters in a press conference. “So probably the biggest single factor driving it is the rate of underlying inflation, or closer related, the idea of where inflation expectations are anchored.”

After the Fed announcements, the implied odds of a 2019 rate cut by some measures fell from 75 percent to 50 percent.

Gold Investors Readjust Positions after Mixed U.S. Economic Data

After liquidating positions on Wednesday and Thursday, gold buyers returned to the market on Friday following reports of mixed-to-weaker-than-expected U.S. economic data. Both speculative buying and short-covering helped boost gold prices to end the week after the U.S. Dollar slipped against a basket of currencies as traders focused on the weaker aspects in the April U.S. payrolls report and a report on non-manufacturing PMI came in below expectations.

In the U.S. non-farm payrolls report, the headline number came in below expectations and the jobless rate fell to its lowest level in more than 49 years. However, the modest 0.2% monthly pace of wage growth and the drop in the job participation rate prompted some investors to sell the greenback, driving up demand for dollar-denominated gold.

Later in the session, gold received additional support when a measure of U.S. services activity from the Institute for Supply Management posted a surprise drop to a 20-month low in April.

Weekly Forecast

This week’s key events likely to have a direct effect on the direction of U.S. Treasury yields, the U.S. Dollar and consequently gold prices are a speech by Fed Chair Powell on Thursday as well as a report on producer inflation. On Friday, investors will get the opportunity to react to the latest data on consumer inflation.

Unless Treasury yields plunge as well as the U.S. Dollar, gold’s upside is likely to be limited. There is room to rally due to short covering and position-squaring, but with the Fed set on hold rates steady at this time and other central banks like the Reserve Bank of Australia and the Reserve Bank of New Zealand ready to cut rates, demand for gold is likely to be subdued. Furthermore, persistent stock market strength indicates there is demand for higher risk assets even at all-time highs.

In order to rally a spark a rally in gold, I think all three key influences are going to have to play a part. This means gold bulls will need to see a drop in Treasury yields, a plunge in the U.S. Dollar and a decent sell-off in the stock market. Otherwise, we’re likely to continue to see two-sided trading with a bias to the downside in gold. Periodic short-covering rallies will likely be fueled by position-squaring rather than aggressive speculative buying.

Don't miss a thing!

Discover what's moving the markets. Sign up for a daily update delivered to your inbox

Latest Articles

See All

Expand Your Knowledge

See All

Top Promotions

Top Brokers

IMPORTANT DISCLAIMERS
The content provided on the website includes general news and publications, our personal analysis and opinions, and contents provided by third parties, which are intended for educational and research purposes only. It does not constitute, and should not be read as, any recommendation or advice to take any action whatsoever, including to make any investment or buy any product. When making any financial decision, you should perform your own due diligence checks, apply your own discretion and consult your competent advisors. The content of the website is not personally directed to you, and we does not take into account your financial situation or needs.The information contained in this website is not necessarily provided in real-time nor is it necessarily accurate. Prices provided herein may be provided by market makers and not by exchanges.Any trading or other financial decision you make shall be at your full responsibility, and you must not rely on any information provided through the website. FX Empire does not provide any warranty regarding any of the information contained in the website, and shall bear no responsibility for any trading losses you might incur as a result of using any information contained in the website.The website may include advertisements and other promotional contents, and FX Empire may receive compensation from third parties in connection with the content. FX Empire does not endorse any third party or recommends using any third party's services, and does not assume responsibility for your use of any such third party's website or services.FX Empire and its employees, officers, subsidiaries and associates, are not liable nor shall they be held liable for any loss or damage resulting from your use of the website or reliance on the information provided on this website.
RISK DISCLAIMER
This website includes information about cryptocurrencies, contracts for difference (CFDs) and other financial instruments, and about brokers, exchanges and other entities trading in such instruments. Both cryptocurrencies and CFDs are complex instruments and come with a high risk of losing money. You should carefully consider whether you understand how these instruments work and whether you can afford to take the high risk of losing your money.FX Empire encourages you to perform your own research before making any investment decision, and to avoid investing in any financial instrument which you do not fully understand how it works and what are the risks involved.
FOLLOW US