Price of Gold Fundamental Weekly Forecast – Price Action Suggests 25bps Rate Cut Priced In

So why the muted reaction by gold to Powell’s revelation? I believe it is because gold traders along with Treasury traders had already priced in a 100% chance of a 25-basis point rate cut. So the key to whether prices move higher over the near-term will be whether the Fed considers a 50-basis point rate cut.
James Hyerczyk
Comex Gold and US Dollar

Gold rallied last week, but the price action was disappointing, given the magnitude of the news driving the movement in the other markets. The key news event last week was Federal Reserve Chairman Jerome Powell’s testimony before Congress at which he finally acknowledged the economy was weakening enough for Fed policymakers to consider a rate cut at its July 30-31 monetary policy meeting.

Last week, August Comex gold settled at $1412.20, up $12.10 or +0.86%.

On July 10, Powell told House lawmakers that since the Fed’s last policy meeting on June 18-19, unresolved trade tensions and worries over the weakness in the global economy have weighed on the U.S. economy enough to create the need for a rate cut later in the month.

“It appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the US economic outlook,” Powell said in prepared remarks.

Minutes of the Fed’s June meeting released shortly after Powell’s testimony underscored the Fed chief’s message, strengthening the case even further for a rate cut.

The majority of policy makers noted that the “economy had appeared to have lost some momentum” in recent weeks at their meeting, pointing to weaker business confidence, trade tensions and signs of slowing of global economic growth. They also highlighted worries over risks that might be spurred by federal budget negotiations or a delay in raising the federal debt limit, according to CNN Business.

“Many judged additional monetary policy accommodation would be warranted in the near term should these recent developments prove to be sustained and continue to weigh on the economic outlook,” the minutes of the June meeting said.

Additionally, several policy makers said a rate cut may be needed in the near future because it could “cushion the effects of possible future adverse shocks to the economy.”

Weekly Forecast

So why the muted reaction by gold to Powell’s revelation? I believe it is because gold traders along with Treasury traders had already priced in a 100% chance of a 25-basis point rate cut. So the key to whether prices move higher over the near-term will be whether the Fed considers a 50-basis point rate cut.

At this time, the chance of a 50-basis point rate cut on July 31 is about 30%. Hurting the chances of such a cut was better-than-expected U.S. consumer inflation data.

This week’s U.S. economic reports are likely to solidify the chances of “50bps cut or no 50bps cut”. They include Monday’s Empire State Manufacturing Index, Retail Sales and Building Permits.

Traders should also pay attention to the Fed speakers this week. In June, Fed policymakers voted 9 to 1 to leave rates unchanged. St. Louis Fed President James Bullard voted for a rate cut. He has already said since then that 50-basis point rate cut is too excessive.

So I think the volatility in gold this week will be fueled by the reports, but mostly by Fed members who could offer clues about the chances of a 25bps or 50bps rate cut.

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