What is moving the price of gold ahead of the next FOMC meeting?

Gold has been increasing steadily with a growing dovish perception of the Fed’s next rate decision.

Gold assessing the Fed’s next move

Since the lows realised in August 2018, the dollar-denominated gold has gained roughly 25% up until 19 July 2019, marking its highest levels seen in six years. The value of the precious metal has been increasing steadily with a growing dovish perception of the US Federal Reserve (Fed), who look set to lower rates, perhaps more aggressively than originally anticipated. The prospect of lower rates has seen bond yields falling and gold (which generally has an inverse correlation to US bond yields) rising.

While economic growth in the US remains robust, for now, the ongoing trade war narrative provides a very real threat to the global economy. Central banks around the world are now adopting a more accomodative monetary stance looking to stimulate inflation and growth. The Fed is set to announce any changes to US rates on the 31 July 2019. The CME Fedwatch tool suggests now that there is a 100% possibility that the Fed will cut rates at the meeting, and that the probability of a 50 basis points (0.50%) cut to the Fed Funds Rate is now 50%.

In theory, the lowering of rates should see a weakening of the dollar, rise in bond prices, fall in bond yields, a rise in inflation and increase in the value of dollar denominated gold. Should the Fed lower rates by 50 basis points (0.5%) we believe that this will be the short-term reaction in the market.

It can be argued that markets have already priced in a 25 basis points (0.25%) cut at the meeting. In turn, a 25 basis points rate reduction might not be enough to extend gains in the precious metal. Market participants positioned for a larger cut and now unwinding positions, could push an inverse reaction in markets, ie dollar strength, lower bond prices, higher bond yields and a decline in dollar-denominated gold.

Gold price: technical analysis and trading view

The short-, medium- and long-term trends for gold remain up, as evidenced by the price trading firmly above the 20, 50 and 200-day simple moving averages (SMA). Followers would look to maintain a long bias to trades on gold positions.

The price action of dollar-denominated gold shows to have broken out of a triangle consolidation. The triangle consolidation was pre-emptive of the uptrend which preceded its formation being continued.

The breakout suggests that the uptrend is now being continued. The height of the consolidation projected from the breakout level predicts a target proportionate in distance to the consolidation, arriving at the $1500/oz level. Should the gold price instead move to close below the support of the triangle pattern at $1395/oz, the bullish breakout would be deemed to have failed.

Gold : a client view

IG clients are mostly bullish on the short-term outlook for gold, with 72% of those with open position on gold (as of 22 July) expecting the price to rise in the near term, while 28% of clients with open positions on the commodity expect it to fall in the near term.

Summary

  • Gold has been rising as US bond yields have been falling
  • Gold has risen as the US dollar has softened on the prospect of lower lending rates
  • Markets are expecting a rate cut of between 25 or 50 basis points at the upcoming FOMC meeting
  • A 50 basis point cut is expected to be favourable for the gold price in the near term
  • A 25 basis point cut may largely be priced in and see a muted to negative response from gold
  • The short-, medium- and long-term trends are up for gold
  • Gold has produced a technical breakout
  • The projected target from the breakout is $1500/oz
  • The failure level for the breakout is $1395/oz
  • As of 22 July, 72% of IG clients with open position on gold expect the price to rise in the near term

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