This week's market sees a "super central bank week", where will gold go?

Following a week of relatively calm economic data and events, this week brings a "super central bank week" to the markets. The Federal Reserve will announce its interest rate decision early Thursday morning.

Luo Liang, a precious metals analyst at CITIC Construction Investment Futures, said that after the release of US inflation data in June, the market expects the Fed to raise interest rates only once more before ending this rate hike cycle, and the market is beginning to bet that the Fed will soon begin a rate cut cycle in the near future. From the current interest rate swap trading, the market has fully digested the expectation of a rate hike in July. If the rate hike becomes a reality next week, its impact on the market will be very limited.

“Because the June Federal Reserve interest rate decision paused a rate hike with a hawkish stance, but its quarterly dot plot suggested a 50bp rate hike in the second half of the year, which means there may be two rate hike time points. Therefore, in this week's interest rate decision, the market will pay more attention to the future interest rate expectations of the Federal Reserve, that is, whether it will continue to emphasize the stubbornness of inflation, and whether it will imply that the future tight monetary policy is still one of the policy tools,” Luo Liang said.

From a macro perspective, Luo Liang believes that the decline in US inflation has entered an acceleration phase, especially the contraction of the rent component on core inflation will have a more significant drag effect in the future. However, the recent rebound in global food and energy prices against the backdrop of the Russia-Ukraine conflict also needs to be wary of the stickiness of future nominal inflation.

“Given that the Fed suffered a credit crisis last year because it underestimated the power of inflation, it is expected that the Fed will not compromise on the trend of inflation this time. Therefore, from the results, it is inclined to believe that this time will raise interest rates by 25bp, but the Fed will emphasize its long-term determination to control inflation,” Luo Liang believes that if the Fed's statement is not so dovish, then there will be some market expectations unmet, the US dollar index will rebound from around 100, and gold prices will fall. If the Fed states that current financial risks still exist and implies that it will pause rate hikes in the future, then the US dollar index will fall sharply, while gold and US equities and other equity assets will rise sharply.

Liu Dongbo, senior researcher of non-ferrous metals and precious metals at Guotai Junan Futures, analyzed that recently, a large number of US economic data have been released. Following the non-farm payroll data being lower than expected, both CPI and PPI fell more than expected, and the market believes that July will be the last interest rate hike in this cycle of the Fed's monetary policy. CME's "Fed Watch" shows that the probability of a 25 basis point rate hike in July is close to 100%, but the probability of another rate hike later is only around 20%. This is inconsistent with the hawkish signals previously released by the Fed and Powell that two more rate hikes are needed.

Liu Dongbo believes that although non-farm payrolls and inflation are developing in a direction favorable to ending interest rate hikes, it is also necessary to see that the weekly initial jobless claims, which have a certain leading indicator for non-farm payrolls, fell to a low of 228,000 last week, reflecting the resilience of employment, and the core inflation rate is still a considerable distance from the Fed's 2% target. Therefore, the market's expectation that interest rates are about to turn may be too optimistic.

“A 25 basis point rate hike at this meeting has been fully priced into the market, and the focus will be on the Fed's policy statement and Powell's remarks to look for further clues on the interest rate path,” Liu Dongbo said. This year, the Fed has repeatedly shown its persistence and determination in combating inflation. Once the expectation of tighter financial conditions is shaken, it will be detrimental to further control of inflation, and recent changes in market expectations have led to a rebound in commodities. Therefore, at this meeting, Powell should not send a signal to end the tightening policy, and will reiterate the necessity of combating inflation, and subsequent policies will depend on the performance of economic data, reserving the possibility of further interest rate hikes. Before the Fed's statement shows any easing, the sharply fallen US dollar has room for repair, and gold is still under pressure to adjust. It is recommended to remain cautious in the short term and not chase higher prices.

“This year is a key time point for the Fed's monetary policy shift, and the price of gold is basically anchored on the Fed's interest rate hike expectations. Every change in interest rate hike expectations brings a turning point in the gold market. It is a high probability event that the Fed will end its interest rate hikes this year, and even if the gold price retraces, the space is relatively limited. Under the optimistic outlook for the medium and long term, gold can still pay attention to buying opportunities after the retracement,” Liu Dongbo said.

Regarding the Federal Reserve's interest rate meeting this Thursday, Gong Ming, a precious metals researcher at Jinrui Futures, said that the market's interest rate hike expectations are currently relatively consistent. According to the FedWatch tool, the probability of a 25bp rate hike at the July interest rate meeting is over 99%, but there is a large difference in the market's opinion on whether July will be the last interest rate hike. On the one hand, the time has already entered the quiet period before the interest rate meeting, and there is a lack of guidance from recent statements by Fed officials; on the other hand, the recently released US inflation data has fallen more than expected, which is contrary to the previous hawkish statements of Fed officials, so there is a large difference in the market.

“Due to the large differences in policy expectations, precious metals may fall into a wide range of fluctuations, and gold is expected to be stuck around 460 yuan/gram before this week's interest rate meeting,” Gong Ming said. Since the focus of this interest rate meeting is on whether to continue raising interest rates at the interest rate meeting in late September, if Powell releases a signal in the meeting resolution that interest rate hikes will stop, the rebound momentum of the US dollar may encounter greater resistance, and gold is expected to be stronger; if Powell's statement is more hawkish, gold may face some downward pressure in the short term.

For precious metals, Gong Ming believes that regardless of whether this interest rate meeting is the last interest rate hike, it is now closer to the end of the interest rate hike cycle, and the next interest rate meeting will be held on September 19-20, with a longer interval, so the policy pressure on precious metals after the interest rate meeting is relatively limited. Reviewing the three interest rate hike and cut cycles of 1999-2003, 2004-2008, and 2015-2020, the upward trend of gold was strongest during the end of the interest rate hike and the early stages of the interest rate cut. Therefore, in the current stage, precious metals are still one of the most suitable asset classes for medium and long-term bullish allocation. However, it should be noted in the short term that in the previous round, the US dollar index adjusted sharply, briefly breaking through 100 before quickly rebounding. The support of the 100 integer level of the US dollar index is still there. If the US dollar index cannot effectively break through the key position of 100, it may be unfavorable to the upward rhythm and slope of gold. For short-term or right-side investors, selling put options and other more flexible option strategies may be a better choice.