Gold prices rose just 1% last week. However, it was the best week since mid-June for yellow metal. The leading crypto Bitcoin (BTC), on the other hand, made a relief rally last week. Cryptocurrencies also mostly followed BTC. Now, the eyes are focused on the US GDP and PCE data, with the Federal Reserve interest rate decision, which will affect the gold and crypto markets.
“Gold and Bitcoin markets focused on what could happen next”
As you can follow on Kriptokoin.com, gold prices showed a slight recovery last week. While not by much, this was the best weekly performance since mid-June. In the crypto market, after the sharp declines, a relief rally came. Bitcoin extended from the lows of $ 18 thousand to $ 24 thousand. The combination of a weaker USD and falling Treasury yields has benefited both the gold market and the crypto market.
Is there more room here for gold to continue the rally? Strategist Daniel Dubrovsky seeks an answer to this question. To better understand the reversal in gold, you need to research what markets expect the Fed to do next. All eyes are on the next rate announcement on Wednesday. This follows US inflation, which is still high. The headline inflation rate hovers at 9.1% annually and consistently beats economists’ estimates. The strategist makes the following assessment:
Still, it’s possible for a more hawkish Fed to work against gold to raise US dollar and bond yields. This has been a broader story this year. Global monetary tightening is also working against gold. However, it seems that last week, the markets focused more on what could happen ahead.
“Gold is likely to be disappointed if the Fed remains firm”
Expectations for a Fed pivot next year rose. Markets predict 2 discounts in 2023. This is attributed to a deeper reversal of the yield curve, specifically the 10-year and 2-year rate difference. Meanwhile, economists are lowering their 2023 real growth expectations. Despite this, the recent rise in near-term breakeven ratios points to higher inflation expectations.
All of this seems to paint a story of markets that saw the Fed support boosting economic growth even though inflation is still at a 40-year high. Can markets get ahead of themselves? We might get a better idea with the Fed this week. According to the strategist, if the Fed continues to be determined to fight inflation, gold is likely to be disappointed.
“It may be too soon for a reversal in the gold price”
In such a case, the strategist sees the US dollar as likely to rise alongside Treasury rates. He also notes that this will not bode well for the yellow metal. Apart from the central bank, the first estimates of second-quarter US GDP data will also come. 0.4% q/q growth is projected from -1.6% in the first quarter. However, a negative data means 2 consecutive contractions of GDP. This is a commonly cited criterion for the technical definition of a recession.
Then the week will end with PCE data, the Fed’s preferred gauge of inflation. Another strong data will keep the central bank on its toes, the strategist says. In this context, Daniel Dubrovsky makes the following statement:
Therefore, it may be too soon to say for a return under. I would go further to say that next week’s risks look skewed to the downside. Therefore, the bearish trend is a baseline forecast.
Weekly economic and financial comments
The Welss Fargo research team interprets how developments and data affect markets.
US: Housing collapse undermines rising recession risk
Higher mortgage rates continue to impact residential activity. The NAHB Housing Market Index fell 12 points to 55 in July. June brought a 5.6% drop in existing home sales, along with a 2.0% drop in home starts. Initial jobless claims rose to 251,000 in the week of July 16. The Leading Economic Index (LEI) fell 0.8% in June. This is the fourth consecutive monthly decline.
International: ECB exits negative interest rates
The ECB raised the deposit rate by 50 basis points, more than expected. Thus, it left the negative interest policy and increased the Deposit Rate to 0.00%. Other key policy rates also increased by 50 basis points, bringing the refinancing rate to 0.50% and the marginal lending rate to 0.75%.
Interest rate watch: FOMC to deliver another jumbo 75 bps increase
The June CPI report increased the chances of a 100 basis point increase at the FOMC’s meeting next Wednesday. However, data has since come in showing that the economy has continued to cool. Also, notable hawks pointed out that a smaller boost should suffice. Therefore, we still expect the FOMC to increase by a dizzying 75 basis points.
Stronger dollar magnifies potential problem for emerging market debt
The US dollar has strengthened extensively throughout 2022, but especially in the last few months. The depreciation of the local currency means potential problems for governments, where a significant percentage of their government debt is denominated in US dollars. This is why fragile countries struggle with potential repayment issues. In this environment, economic growth in the emerging and developing world is likely to slow sharply and the probability of default is likely to rise across the spectrum.
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