The outlook for Gold futures has been teetering on the brink of correction in recent weeks. A hawkish-sounding Fed Chair Powell may have tipped the balance for a continued correction in the yellow metal. However, the big question is whether markets believe him.
- Powell insists another half a per cent in rate hikes is a “good guess”
- But do markets really believe it?
- Gold is moving lower despite weakness in USD and consolidation in Treasury yields
Fed Chair Powell sounds hawkish
Last week’s FOMC decision for a “hawkish hold” came with the dot plots implying that two more 25 basis points rate hikes were possible this year. For his part, Fed Chair Powell is trying to sound tough in selling this to markets.
In the first of his Congressional testimonies this week, Powell was asked about the prospect of two more hikes this year. Insisting that the hold last week should not be considered to be a pause, he responded that he felt this to be “a pretty good guess”.
Do markets believe him?
The short answer is, no, not yet.
Powell reiterated yesterday that the majority of FOMC members were expecting two more rate hikes this year. However, according to CME Group FedWatch, markets continue to price less than an 80% probability of a single 25 basis points hike in the next few meetings. After that, pricing begins to move towards rate cuts. Although the first prospective rate cut has been pushed deep into Q1 2023, there is a lack of appetite to believe Powell’s assertion of two more rate hikes.
Two Fed members talked about a continued pause yesterday. Austan Goolsbee said the FOMC was in “wait and see” mode as more data comes in. Also, Raphael Bostic suggested waiting beyond July for the next hike as inflation could continue to fall.
So this will only add to the caution in markets. Although the balance of the Fed dots point towards more hikes, it will be interesting to see as more members give speeches in the coming weeks, whether there is a shift.
However, if the data shifts then markets would begin to respond more. There have been signs in recent weeks that perhaps the extent of the economic slowdown is not as certain as it looked previously, whilst house market indicators have also begun to turn more positive too. This lends a sense of resilience in the economy that would allow the Fed to hike more if inflation remains stubbornly high.
However, for now, any improving signs that are present are not translating into US bond markets. Despite Powell’s assertions yesterday, Treasuries were very quiet, with consolidation patterns on the 2-year and 10-year yields over the past week. Furthermore, yield spreads are tracking deeper into negative once more. This reflects the increasing yield curve inversion. It is also a condition that continues to imply significant concern over a potential recession.
This is important as the lack of decisive reaction on Treasury yields is also coming as the US Dollar Index is once more beginning to trend lower. This deterioration that has been seen in the USD since early June could now mean that there is a retest of the February and April lows around 100.80 over the coming weeks.
More importantly, though, is that gold and the USD are now falling at the same time. This is very rare as the chart of their traditionally strongly negative correlation shows. Whilst this may continue for now, it is unlikely to be a long-lasting situation. If economic data for the US shows decisive improvement, there will likely be more rate hikes. Yields will move higher and likely lend support for the USD. We would favour continued downside in gold in this scenario.
Gold is increasingly falling over
For now, the weaker USD is not supporting gold and this has to be a concern for gold bulls. Looking at the technical analysis the news is not great either. Gold futures show a deteriorating outlook and a correction increasingly taking hold. An eight-month uptrend channel has been broken and in the past six weeks, there has been a run of lower highs and lower lows forming a new downtrend. Momentum has turned negative with the RSI consistently faltering under 50. This points towards rallies being seen as a chance to sell.
Yesterday’s move was a decisive close below the previous support of around $1939, whilst the market is also testing lower this morning. The 61.8% Fibonacci retracement of the $1806/$2072 bull run is the next basis of support at $1908 but there is little decisive support until the $1855/$1870 support area. It looks increasingly as though gold is in a corrective phase now. The importance of the $1970/$1983 resistance band is growing by the day.
