Gold gains further ground as Fed’s tightening debate intensifies, more volatility ahead

Gold along with other commodities rose for the second consecutive week as the US dollar dipped deeper into the red territory.

The commodity US dollar inverse relation has strengthened further in the last few days and trends in the US dollar may continue to remain the key price determining factor as market players try to assess Fed’s next move.

Gold has behaved more as a commodity in the last few days as market players switched between the safety of the US dollar and riskier assets like commodities and equities.

The yellow metal gained 2.2 per cent last week and has recovered about 5 per cent from the March 2021 lows set just a week ago. The Bloomberg commodity index gained 4.6 per cent last week reflecting general strength across commodities.

The US dollar index fell just over 0.5 per cent marking its second weekly decline and has corrected more than 3 per cent from the 2002 high set earlier this month. The US dollar lost momentum amid increasing debate about the Fed’s monetary policy.

The US central bank stuck to market expectations and raised the interest rate by 0.75 per cent and also maintained that getting inflation under control is a priority which means that rate hikes may continue until there is a significant improvement in the inflation situation.

The US Fed raised interest rates at a pace like that at its June meeting and this pause was seen as a sign that the central bank is halting to assess the impact of monetary tightening on economic growth.

Market expectations that the Fed may slow down the pace of rate hikes going ahead rose as Fed Chairman Jerome Powell indicated that the central bank may slow down the pace of rate hikes at some point and that they will take a meeting-by-meeting approach.

Comments from the Fed Chair indicated that the central bank may assess economic data to determine the next move. Disappointing US growth data strengthened the case for the Fed to slow down.

The US GDP fell 0.9 per cent in Q2 after a 1.6 per cent decline in the previous quarter. Market expectations were of a modest 0.5 per cent growth in Q2.

While market players are hopeful that the Fed may slow down the pace of rate hikes, it may not happen soon as inflation is still out of control. The US PCE price index rose 6.8 per cent on the year in June, the highest rate since January 1982.

University of Michigan consumer 1-year inflation expectations dipped from 5.3 per cent to 5.2 per cent but 5-year inflation expectations were slightly higher than forecast.

The US Fed may continue with rate hikes to get inflation under control and may also lead other central banks in monetary tightening and this may keep the US dollar supported.

The US currency may also benefit from safe-haven buying amid increasing challenges to the US and global market.

However, with the Fed taking an open-ended approach, market players may react to economic numbers to determine the Fed’s next move.

The next major trigger may come from the US non-farm payroll report.

Gold’s recovery is also challenged by weaker investor interest and concerns about consumer demand in India and China.

Gold ETF investors have continued to exit the market amid concerns that higher interest rates globally may reduce the appeal of the metal.

The ETF investors may not re-enter unless we see significant price recovery or fresh positive factors. Concerns about consumer demand in India are high as prices are still at elevated levels due to a weaker rupee and import duty hike.

Meanwhile, virus-related restrictions in China are hampering economic activity. The World Gold Council, in its latest report, indicated that global gold demand may remain flat in 2002.

Gold may continue to move in sync with larger commodity markets in the near term and trends in the US dollar and general risk sentiment may affect prices.

The key factors to look for in the near term will be China’s manufacturing and services PMI, the Bank of England’s monetary policy decision, and the US non-farm payrolls report.

China’s economic numbers may reflect on the health of the economy while the BOE interest rate decision may highlight if the central bank is fastening pace of rate hikes to control inflation while the US jobs report will help determine if the labour market is strong enough to withstand the Fed’s monetary tightening.