Daily Report – 15 July 2022

Fundamental Report: After a one-day reprieve from its bear market, gold is trading lower on Thursday, hurt by fears the U.S. Federal Reserve could move toward a more aggressive interest rate hike at its July 26-27 monetary policy meeting to fight red-hot inflation. Breaching 1700 mark on intraday basis signal downside possible. The traders believe the Fed will front-load its rate hikes but not necessarily increase overall rate hike expectations. According to the FedWatch indicator, the Fed is seen ramping up its battle with sky-high inflation with a supersized 100 basis points rate hike at its upcoming policy meeting on July 26-27. With some experts still pressing for a 75-basis point rate hike at the Fed meeting, and others now pushing for a 100-basis point rate hike, there is enough room to produce a choppy, two-sided trade ahead of the Fed decision. To look at it another way, based on the inflation data, some traders now see a 75-basis point rate hike as “dovish” when compared to the possibility of a 100-basis point rate hike. Traders are now awaiting inflation data on producer prices (PPI), due to be released at 12:30 GMT. Another hot inflation reading is likely to put pressure on the Fed to front-load its rate hike advances with a 100-basis point hike in July. If the PPI report is neutral then traders are likely to sit on their hands until Friday’s U.S. Retail Sales report. A strong retail sales report will signal to the Fed that the economy is in good enough shape to handle an aggressive, front-loaded rate hike. This will solidify the chances of a 100-basis point rate hike, which would be bearish for gold. A weak retail sales report will likely convince the Fed that a 75-point rate hike would be sufficient at this time. This is likely to trigger a short-covering rally in gold.

The rising inflation could be positive for gold as – given the economic slowdown – it implies that stagflation is coming. It could also upset the markets and boost the safe-haven demand for gold. However, in the current environment, stubbornly high inflation implies a more hawkish Fed. As long as the US central bank delivers hikes in the federal funds rate, the markets don’t see inflation as a long-term problem. So, the more persistent inflation is, the more aggressive the tightening cycle could be. Indeed, according to the CME FedWatch Tool, the market-based probability that the FOMC will raise rates by 100 basis points at its July meeting has risen from literally zero last week to more than 80% after the CPI inflation report. Is it unbelievable? Well, such a mammoth hike was just delivered by the Bank of Canada. So, the Fed can follow suit, and the more decisive actions of the US central bank, the higher interest rates. The higher interest rates, the stronger the dollar. Rising real interest rates and the appreciation of the US dollar are powerful headwinds for gold. Not surprisingly, the yellow metal plunged yesterday to an intraday low of $1698 within the first 15 minutes of trading in New York. However, it rebounded later to $1,744.30, but after all, the London price went down. It could further decline if hawkish expectations on interest rates strengthen. But the aggressive tightening will end in a hard landing, which should ultimately make gold shine.