Gold Retreats as a Possible Rate Hike Looms

Market Trends - 21/07/2016

Gold continued to retreat on Wednesday, slipping to new 3-week lows after positive economic developments combined with the outlook for interest rate added to downward pressure. The precious metal was weighed down by a combination of a stronger dollar and rising speculation that the Federal Reserve would act on interest rates before the end of the year. Gold finished the session at $1,317.05 per troy ounce, down -0.17% from the opening bell. An array of positive US economic reports including ISM manufacturing, building permits, and producer price inflation released to-date this month providing the backdrop for gold’s sustained slide over the last few sessions. Historically gold is extremely sensitive to evolving US economic data and has traditionally exhibited a strong inverse correlation to the US dollar. With a series of positive US economic reports delivered over the last few weeks, the long anticipated FOMC rate hike is back under the magnifying glass, potentially adding to gold’s woes if the stance turns more hawkish.

Earlier this morning, the CME Group’s FedWatch indicator displayed an increased probability of a 25 basis point rate hike in September, moving higher from 18.8% to 24.6%. Despite rising speculation, caution is suggested considering patterns that have emerged over the years with respect to Fed Funds futures and the actually timing of action on interest rates. Further to the point was speculation ahead of last year’s hike that action on rates would come sooner than it actually arrived, after policymakers opted to defer normalization efforts until December. As for the upcoming meeting of July 27, the current probability of another rate increase is steady at 1.2% and will almost certainly stay flat ahead of the FOMC meetings set for next Tuesday and Wednesday. With major fundamental reports such as second quarter GDP estimates, core durable goods orders, and consumer confidence figures on the horizon next week, investors will be keeping a close eye on the Federal Reserve’s posture and language. Considering any shift in sentiment could potentially increase the probability of a rate hike, hawkish pressure could see gold’s value drop even further.

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