The international gold price fluctuates within a narrow range, waiting for the results of the collision of two contradictory expectations
On Wednesday (February 1), international gold prices fluctuated within a narrow range, as investors avoided large bets ahead of the Federal Reserve’s new policy decision. Short-term interest rate markets have been pricing in two rate cuts from the Fed this year. However, the Fed sidestepped that, saying more was needed to fight inflation.
At 15:12 Beijing time, spot gold fell 0.05% to $1,927.30 an ounce; the main COMEX gold futures contract fell 0.13% to $1,942.7 an ounce; the U.S. dollar index fell 0.03% to 102.067.
Matt Simpson, senior market analyst at City Index, said that gold prices should stay above $1,900 ahead of the Fed meeting, but the market needs to listen to the Fed’s message to grasp the possible direction of gold prices next.
The Federal Reserve’s first interest rate decision this year will be released at 3 o’clock on Thursday (February 2) Beijing time. The Fed is widely expected to further scale back rate hikes to 25 basis points. In half an hour, Chairman Powell will hold a news conference.
Data released overnight showed U.S. labor costs rose at the slowest pace in a year in the fourth quarter as wage growth slowed. Still, U.S. core inflation remains well above the Fed’s 2 percent target.
Now is the time to test two competing expectations for the Fed’s rate path. Short-term interest rate markets have been pricing in two rate cuts from the Fed this year. However, the Fed sidestepped that, saying more was needed to fight inflation. A summary of the Fed’s economic projections released in December showed no rate cuts at all in 2023.
Herein lies the paradox. The Fed is not expected to cut rates this year, while short-term interest rate markets are pricing in two cuts from the Fed. So, how will the Fed communicate to the market? Will the Fed overturn short-term interest rate market forecasts and emphasize no rate cuts? Or will the Fed ditch its December forecast and start talking about a pause in rate hikes or cuts due to worries about the growth outlook?
If the Fed proposes to start moving towards a terminal interest rate exceeding 5.5%, it will be a clear signal that the Fed is worried about the long-term high inflation, which will constitute the Fed’s hawkish tendency and should trigger a further rise in the dollar.
According to Eren Sengezer of FXStreet, as long as $1,900 is held, gold bulls will continue to dominate the trend. “However, if the daily close is below $1,920, the price of gold may continue to be revised down to the $1,900 mark. A loss of $1,900 will be seen as a turnaround and attract sellers. In this case, the next short-term support level will be It’s $1,880.”