Next week can play out one of two ways — the Federal Reserve introduces a 25-basis point rate cut and gold consolidates, or the central bank doubles down on easing with a 50-basis point cut and gold rallies to new highs, analysts told Kitco News.
Gold has traded in a range between $1,430 and $1,411 this week, looking to end the session on Friday down 0.55% on the week. August Comex gold futures were last at $1,418.50, up 0.27% on the day.
All eyes turn to the Federal Reserve’s rate decision next week, scheduled for Wednesday. Markets are currently pricing in a 78.6% chance of a 25-basis point cut and a 21.4% chance of a 50-basis point cut, according to the CME Group’s FedWatch Tool.
Markets are widely expecting for the Fed to begin its easing cycle, but what will matter the most is whether the central bank is embarking on a major easing cycle or just a couple of rate cuts.
“The fact that overall the U.S. economy is not dropping off a cliff is consistent with our view that we are only looking for a quarter-point cut now, another quarter-point cut before the end of the year, and then the Fed going on hold in 2020,” said CIBC Capital Markets chief economist Avery Shenfeld. “For the Fed to continue on cutting into 2020, you’ll have to have the economy remain very slugging next year.”
25-Basis Point Rate Cut Scenario
Gold is likely to consolidate but hold above the $1,400 an ounce mark if the Fed sticks to a 25-basis point cut this Wednesday.
“ might go a little bit lower because there is still a portion of the market that is expecting a 50-basis point cut next week. Ultimately, we’ll get a 25-point cut and we’ll a bit of a re-pricing lower in gold,” said TD Securities commodity strategist Ryan McKay.
A break lower in gold and testing of the $1,400 level is most likely in a quarter-point cut scenario, said LaSalle Futures Group senior market strategist Charlie Nedoss.
Overall, gold is expected to remain a great long-term buying opportunity to investors, McKay added. “Ultimately, any dip will be a buying opportunity for the longer-term … Gold is very well supported due to global central banks shifting to this easing tone,” he said.
The U.S. GDP data from Q2, which came in slightly better-than-expected, will play a role in the Fed’s decision, especially when it comes to inflation.
With the U.S. economy slowing to 2.1% in Q2 and Fed’s key inflation metric — core PCE (Personal Consumption Expenditures) — coming in below expectations at 1.8%, it might just be enough to see the Fed cut rates by 25 basis points.
“Core PCE at 1.8% is further ammunition for the doves at the Fed meeting next week,” McKay noted.
The overall economic slowdown, however, was not particularly severe, noted Shenfeld, which is why a 25-basis point cut is the likely scenario.
“The items that the Fed is worried about — a decline in global growth rate, the impacts of trade wars on exports, and the impacts on business confidence all showed up in the report,” he said. “A modest dose of interest rate relief will help turn the corner on housing, which has been a drag and support on the continuation of reasonable growth and consumer spending, which together should be enough of a tailwind to offset the drag from a softer global economy.”
50-Basis Point Rate Cut
A major cut by 50 basis points would see gold rally to fresh multi-year highs and test the $1,454 levels and possibly higher, according to analysts.
“If the Fed does a 50-point cut, we would come back up and test those recent highs $1,454-40,” said Nedoss. “What gold is looking at is that we are in an easing cycle, but where are we in that cycle. We started the year by talking about one rate cut, then two, then three, then back to two.”
What Else To Watch
A central thing to watch on the global front is how other economies are growing this summer, with a majority of key central banks turning dovish this year, including a new stimulus package that is likely to be introduced by the European Central Bank (ECB) this September.
“ plays into the global theme of central banks easing and the negative-yielding debt pile continuing to surge.
Other items on the radar next week are the U.S. employment report, the ISM manufacturing index and U.S.-China trade talks.
Gold has traded in a range between $1,430 and $1,411 this week, looking to end the session on Friday down 0.55% on the week. August Comex gold futures were last at $1,418.50, up 0.27% on the day.
All eyes turn to the Federal Reserve’s rate decision next week, scheduled for Wednesday. Markets are currently pricing in a 78.6% chance of a 25-basis point cut and a 21.4% chance of a 50-basis point cut, according to the CME Group’s FedWatch Tool.
Markets are widely expecting for the Fed to begin its easing cycle, but what will matter the most is whether the central bank is embarking on a major easing cycle or just a couple of rate cuts.
“The fact that overall the U.S. economy is not dropping off a cliff is consistent with our view that we are only looking for a quarter-point cut now, another quarter-point cut before the end of the year, and then the Fed going on hold in 2020,” said CIBC Capital Markets chief economist Avery Shenfeld. “For the Fed to continue on cutting into 2020, you’ll have to have the economy remain very slugging next year.”
25-Basis Point Rate Cut Scenario
Gold is likely to consolidate but hold above the $1,400 an ounce mark if the Fed sticks to a 25-basis point cut this Wednesday.
“ might go a little bit lower because there is still a portion of the market that is expecting a 50-basis point cut next week. Ultimately, we’ll get a 25-point cut and we’ll a bit of a re-pricing lower in gold,” said TD Securities commodity strategist Ryan McKay.
A break lower in gold and testing of the $1,400 level is most likely in a quarter-point cut scenario, said LaSalle Futures Group senior market strategist Charlie Nedoss.
Overall, gold is expected to remain a great long-term buying opportunity to investors, McKay added. “Ultimately, any dip will be a buying opportunity for the longer-term … Gold is very well supported due to global central banks shifting to this easing tone,” he said.
The U.S. GDP data from Q2, which came in slightly better-than-expected, will play a role in the Fed’s decision, especially when it comes to inflation.
With the U.S. economy slowing to 2.1% in Q2 and Fed’s key inflation metric — core PCE (Personal Consumption Expenditures) — coming in below expectations at 1.8%, it might just be enough to see the Fed cut rates by 25 basis points.
“Core PCE at 1.8% is further ammunition for the doves at the Fed meeting next week,” McKay noted.
The overall economic slowdown, however, was not particularly severe, noted Shenfeld, which is why a 25-basis point cut is the likely scenario.
“The items that the Fed is worried about — a decline in global growth rate, the impacts of trade wars on exports, and the impacts on business confidence all showed up in the report,” he said. “A modest dose of interest rate relief will help turn the corner on housing, which has been a drag and support on the continuation of reasonable growth and consumer spending, which together should be enough of a tailwind to offset the drag from a softer global economy.”
50-Basis Point Rate Cut
A major cut by 50 basis points would see gold rally to fresh multi-year highs and test the $1,454 levels and possibly higher, according to analysts.
“If the Fed does a 50-point cut, we would come back up and test those recent highs $1,454-40,” said Nedoss. “What gold is looking at is that we are in an easing cycle, but where are we in that cycle. We started the year by talking about one rate cut, then two, then three, then back to two.”
What Else To Watch
A central thing to watch on the global front is how other economies are growing this summer, with a majority of key central banks turning dovish this year, including a new stimulus package that is likely to be introduced by the European Central Bank (ECB) this September.
“ plays into the global theme of central banks easing and the negative-yielding debt pile continuing to surge.
Other items on the radar next week are the U.S. employment report, the ISM manufacturing index and U.S.-China trade talks.