The anticlimactic performance of gold continues as the prospect of aggressive rate hikes by central banks around the world amid heightened inflationary pressures, dampen the precious metal’s shine. Moreover, China’s ongoing draconian lockdowns, a worsening energy crisis especially prominent in the European continent, alongside widespread fears of economic slowdowns worldwide render the bullion unattractive. In this report we aim to shed light on the catalysts driving the precious’ metal price, assess its future outlook and conclude with a technical analysis.
Upward surprise of CPI data shook gold
The precious came under significant pressure last week, plunging into its lowest levels in over two years, as higher than expected US inflation numbers were announced and as the upward surprise boosted inflows in the dollar, the bullion faced headwinds with investors fleeing the scene. The month-on-month CPI rate for August unexpectedly rose to 0.1% compared to the previous month 0% rate while the year-on-year CPI rate again for the month of August softened, yet less than expected, to 8.3% compared with the 8.5% of the previous month, signaling that inflation remains elevated at dangerous levels and the Fed will be left with no choice but to aggressively pursue its monetary policy tightening as explicitly expressed, in its attempt to curb inflationary pressures even at the expense of tipping the economy in a recession.
Even more troubling were the results for the Core CPI which came out twice as large as the forecasts and the previous month’s rate, recording a 0.6% increase on a month-on-month basis, with sustained increases in rents being particularly worrisome, showcasing the stickier nature of inflation within the markets which is yet to be eased, raising serious concerns over the health of the US housing market.
The Fed’s expected 75 basis points rate hike scenario following the release was cemented and the market went as far as to prompt speculations that the Fed may deliver an even larger, 100 basis points rate increase, in the next meeting on September 21st.
Critical Fed interest rate decision tomorrow
The greenback holds steady ahead of a crucial Fed interest rate decision tomorrow 21st of September, lingering close to its 20-year highs and investors refrain from placing any big bets ahead of the meeting. Gold on the other hand, continues to appear beaten down and prone for further downside displaying the negative correlation encompassing the two safe haven assets. It‘s characteristic that currently Fed Fund Futures are implying a 82% probability that the bank is to proceed with a 75 basis points rate hike, while the rest tend to imply a full 100 basis points hike. Therefore, should the bank proceed with a 75-basis points rate hike as expected, we may see part of the market being disappointed and thus the dollar may weaken.
On the other hand, in each case we would expect the bank to maintain a clearly hawkish tone, with confidence, given also the rather solid employment data for August, and the aforementioned higher than expected inflation report, released previously this month.
Moreover, after the decision, investors may also be searching for clues regarding Fed policymakers’ views and particularly place emphasis on Fed Chair Powell’s speech, who could hint on where interest rates should be over the coming years, which is also to be more evident in the new dot plot. Moreover, it is not only the dollar superiority that weighs on the precious. We would also like to point out that the US 10-year yield has risen today to its highest levels since 2011 and the extended steepening of the inverted yield curve drains out any hope for a revival in the shiny metal’s inflows for now.
Finally, even though gold is considered to be a safe bet during times of economic uncertainty, interest rate hikes increase the opportunity cost of holding the bullion. In our assessment gold will continue to be driven by sentiment in the dollar in the short term and odds for gold raising to previous high levels dimmish, given the current state of things. Overall, the hawkish narrative is expected to be showcased once again, since the favorable employment report results, point at a rather resilient labor market which in turn allows the Fed to single-mindedly focus on curbing persistent inflationary pressures and attempt to prevent inflation from becoming deeply entrenched within the economy.
