Gold Weekly Review: Gold price decline is limited, FED will continue to raise interest rates, but the end of tightening is approaching

The US Federal Reserve is about to enter a period of silence ahead of its policy meeting in May, and several Fed officials have pointed to raising interest rates in May this week to combat high inflation. This prospect has boosted the dollar, putting it on track to avoid a five-week losing streak and sending gold prices down for two weeks. But a series of recent weak data on employment and consumption in the United States have strengthened expectations of a US recession, indicating that this round of tightening cycle is coming to an end, and it may even start to cut interest rates. Gold prices have limited downside space in the future market.

The US Federal Reserve is about to enter a period of silence ahead of its policy meeting in May, and several Fed officials have pointed to raising interest rates in May this week to combat high inflation. This prospect has boosted the dollar, putting it on track to avoid a five-week losing streak and sending gold prices down for two weeks. But a series of recent weak data on employment and consumption in the United States have strengthened expectations of a US recession, indicating that this round of tightening cycle is coming to an end, and it may even start to cut interest rates. Gold prices have limited downside space in the future market.

Federal Reserve officials eagle

As of press time, spot gold fell 0.57% to $1988.85 an ounce this week, while the dollar index rose 0.29% to 101.884 as expectations grew for a rate hike at the Federal Reserve's May meeting. Several Fed officials spoke this week, basically agreeing that further rate hikes are still necessary to reduce inflation.

Most market participants believe that the Fed only needs to raise interest rates one more time to 5.00% -5.25%. But St Louis Fed President Brad believes that another 50 basis points to 5.50% -5.75% need to be raised on this basis.

Mr. Bullard's comments underline the radical side of the Fed's ongoing debate about how to calibrate the final path of the current rate-hiking cycle in light of evidence that underlying inflation is not falling rapidly towards its 2 per cent target. The Fed's preferred measure of inflation - the core personal consumption expenditure price index - remains above 4 per cent annually even as the economy faces a slowdown.

New York Fed President William Williams said on Wednesday (April 19) that the current level of inflation is still problematic and the Federal Reserve will take action to reduce inflation. He believes that economic growth will slow this year, but there will be no recession, and then rebound next year.

Cleveland Fed President Mester said the Fed still had more opportunities to raise interest rates. "Product and labour market demand still outstrips supply and inflation remains too high. To keep inflation down to 2 per cent, I expect monetary policy will need to move further into restrictive territory this year, with the federal funds rate above 5 per cent."

Bank of Singapore currency strategist Sim Moh Siong said that U.S. bank funding conditions are stabilizing, and we are hearing from hawkish Federal Reserve officials, so this has limited the dollar's decline.

Ole Hansen, head of commodity strategy at Saxo Bank, said the market was repricing the timing of high interest rate runs as it readjusted its expectations of the Fed's interest rate path. Gold was trading below its 21-day moving average, suggesting the rally had lost some steam and sparked some long profit-taking.

Macro data suggest the U.S. economy is resilient and further fuel concerns that the Federal Reserve may have more work to do to control inflation while easing fears of a full-blown banking crisis. This should help limit the downside in Treasury yields and attract new dollar buying at lower levels, suggesting that the path of least resistance for gold prices remains downwards.

The Federal Reserve's tightening cycle is coming to an end

Since March last year, the Federal Reserve has raised interest rates nine times in a row, with a cumulative increase of 475 basis points. Interest rate futures suggest that the market expects a near 90% chance of the Federal Reserve raising interest rates by 25 basis points next month, then pause the rate hike and cut rates before the end of the year. Some Fed officials and market participants believe that interest rates will remain unchanged for the rest of 2023 after the May rate hike.

Mr. Bostic, the president of the Atlanta Fed, said the Fed was likely to raise rates one more time, then pause to see how policy affected the economy and could keep rates high for longer. "There's really nothing to do but monitor the economy for the rest of the year and into 2024."

Michael Gabon, chief US economist at BofA Securities, said: "On the data side, despite the March slowdown in inflation, there is still a lot of work to be done to get back to the 2 per cent target. We maintain our expectation that the Fed will start cutting rates in March 2024."

Yeap Jun Rong, market analyst at IG, said: "The expectation of a 25 basis point rate hike in May has been reflected in market pricing, so the main focus is on whether the Federal Reserve will signal a pause in rate hikes later. While this may provide support for gold prices, considering the recent rebound and the need for technical corrections, there is still the possibility of some position squaring after the Fed's interest rate outlook is verified."

Raising interest rates is a double-edged sword

The Fed's move to rein in inflation will also dampen growth, with recent economic data showing signs of a cooling labour market, slowing manufacturing activity and falling consumer spending adding to the recession outlook.

The slowdown in the labour market has exacerbated declines in retail sales and manufacturing activity, raising the risk of a recession as early as the second half of this year, with surveys suggesting a 70 per cent chance of a US recession over the next two years.

A recession could reduce the Fed's room to keep raising interest rates, especially if most of the previous increases have yet to really affect the economy. Recent strains in the banking sector could weigh on economic activity, with banks tightening lending, which could make it harder for households and small businesses to get credit.

Cleveland Fed President Mester pointed out that supply imbalances in the economy are improving, and as the cumulative impact of the Federal Reserve's interest rate hikes on the economy continues to be felt, the aggressive measures that began last year to raise borrowing costs to curb high inflation are nearing an end.

Christopher Rupkey, chief economist at FWDBONDS in New York, said: "For the first time, after months of observation, we can say we saw a recession coming, and it would be a miracle if we didn't see a downturn."

Erik F. Nelson, macro strategist at Wells Fargo Securities in London, said: "It is becoming increasingly clear that the US economy is heading for a recession. It is only a matter of time. A recession in the US will be bad for the dollar. If the US leads the world into a recession, it will be hard to see huge demand for the dollar."

StoneX analyst Rhona O'Conell said in a note that with most of the U.S. data released in recent times pointing to an economic slowdown and weighing on the dollar, these background effects remain supportive for gold.

Hareesh V of financial services firm Geojit said that gold market conditions are still likely to be bullish, but there will be some corrections in prices, despite uncertain global economic and geopolitical tensions supporting its safe-haven status. Gold prices are not expected to decline significantly.

The full impact of the credit market turmoil on the economy will soon become clear, after which we could see a major correction in interest rate expectations, bond markets and even gold prices. If the current hawkish bets on the Federal Reserve fade quickly, a record high in gold prices may not be far off.