Gold is now trading near a six-year peak of $1,439 a week ago. A return to $1,400 is unlikely to be a problem, investors are most interested in whether quotes will manage to get to their favorite level of $1,500 and move on. This, in particular, will depend on what the Fed's main figures will say this week. It all starts with Jerome Powell's two-day speech.
Market participants have reduced their appetite for the pace of rate hikes in the United States after the release of strong data on employment, but still believe in a symbolic easing policy. In Powell's words, they will scrupulously look for hints of the prospects for lower rates this month.
The publication of the minutes of the June Fed meeting is significant for gold traders. This document will help them better understand why the officials then decided to postpone the rate cut.
In June, officials removed the word "patience" from their statement, and Powell recently used the phrase "prevention is better than treatment". This suggests that the US central bank is leaning toward preventive policy easing in order to avoid a possible slowdown in the economy.
Judging by the past meetings, the US regulator is known for its discretion. Therefore, it may not postpone the rate cut by 25 bp, which the market relies on so much to follow the situation in the country's economy. It is worth noting that there are traders expecting a decline of 50 bp, but such units.
This week, there will be a whole group of Fed officials and the most interesting one for investors will be the President of the Federal Reserve Bank of St. Louis, James Bullard. At the June meeting, he was the only one who did not agree with the decision to leave interest rates unchanged. Bullard compared with other members of the Fed committee holds the most dovish stance.
Analyst opinions on gold
Gold will reach $1,500 and move higher, according to Bank of America Merrill Lynch. However, strategists are worried about short-term risks. "The market overestimated the likelihood that the US central bank will lower rates," and if policy easing is postponed, for example, "due to the constructive results of the G20 summit," this will cause a drop in precious metal prices.
The same opinion is shared by UBS. However, they are waiting, gold will end the current year below $1,400, the next one will be close to $1,450, and only then will investors see the coveted mark of $ 1,500.
The National Australia Bank raised its forecast for the price of the yellow metal in 2019 to $1,400 per ounce. Earlier it was about $ 1,380 per ounce.
"We are still expecting two reductions in the US Federal Reserve rates - in July and September. This will support the precious metal," analysts wrote.
Gold is expected to become more attractive in the event of a further decrease in the yield of G7 countries. The demand for precious metals will grow from both long-term investors and short-term speculators. The world's central banks will also show an increased interest in gold.
It seems that the head of the Fed finally convinced the market of a rate cut in the near future. Under the influence of the regulator's dovish mood, the dollar index fell from three-week highs, which it held in recent days. The "minutes" of the Fed were ignored by the market, although it followed that not all central bank officials were ready for policy easing.
Traders preferred to listen to the words of Jerome Powell, who, in their opinion, gave a clear signal for aggressive policy easing. The head of the Federal Reserve Bank of St. Louis, James Bullard, also played a role here, stating that a quarter-percent reduction in rates is necessary to keep the US economy from slowing down due to a trade war and amid steadily low inflation.
However, today the United States published a report according to which consumer prices in the country unexpectedly rose in June by 0.1%. Economists were counting zero dynamics of the indicator.
Powell is set to hold another speech on Thursday. It is unlikely that he will add something fundamentally new to what he said yesterday regarding the prospects for policy easing, but anything can happen. If, for example, he more accurately speaks about an immediate rate cut by 0.50%, then the dollar can repeat yesterday's scenario.
The EUR/USD pair will get every chance to go towards the 1.1400 mark. Under other circumstances, there is a risk that quotes would reverse dowards.
The trigger to pull down the main pair could be the publication of the minutes from the ECB's June meeting. However, this did not happen, the euro did not pay attention to the fact that members of the ECB almost unanimously recognized the need to prepare for easing monetary policy in the region.
It seems that Forex is entering a new phase of currency wars. Traders perceive that the US central bank's reduction in rates is a preventive measure modeled on 1995 and 1998, when the regulator acted on the lead and saved the country from recession. The central bank also weakened the policy in 2001 and 2007, when the negative had already begun to show its first sprouts, but in fact everything turned into a recession. The desire to prevent a possible recession is commendable, but not only Fed officials are thinking about it. The European regulator is also ready to cut rates and revive the quantitative easing program. It is worth saying that, perhaps, there are more reasons for the ECB than the Fed. Take, for example, the worsening estimates of GDP and inflation for 2020 and statements by German politicians that the EU needs to seriously tune in to a trade war with the US.
The euro and the dollar are weak and their condition is supported by central banks. Thus, the EUR/USD pair will continue to stay within the consolidation range of 1.12-1.14 indicated at the beginning of July.
The ECB and the Fed are going to cut rates, while the Bank of England is not yet ready for this, and this could support the pound
The single European currency fails to demonstrate a steady upward trend, despite expectations that the US Federal Reserve System (FRS) will cut interest rates for the first time in ten years.
Derivatives market expects the US central bank to lower the rate in July and September. This is a negative point for the dollar. Why then the euro can not benefit from this?
The fact is that the ECB also does not exclude the possibility of easing monetary policy to stimulate the European economy and inflation in the region.
UBS analysts believe that the regulator will lower the deposit rate twice before the end of this year.
"Most likely, this will happen in September and December, and each time the step size will be 10 basis points. In addition, the ECB may resort to QE, if the outlook for the economy and inflation in the eurozone worsens, downside risks associated with trade policy and geopolitical uncertainty materialize, or the Fed has a weaker monetary policy than expected. We think that at the meeting next week, the ECB will make adjustments to its statements of intent to prepare the markets for the coming changes," they noted.
Thus, it turns into a "vicious circle": both the American and European central banks want to cut rates and lower the rate of their currency. Who will lose: euro or dollar? It is possible that this week will be a draw and the next winner will be the greenback.
Meanwhile, the Bank of England, it seems, is not yet ready to lower interest rates. Moreover, some members of the BoE Monetary Policy Committee are considering the possibility of raising rates in the fall, if after Brexit there is a high increase in consumer prices.
According to a number of analysts, since the ECB and the Fed are setting investors to lower rates, the pound can show good growth in quotes.
"The pound is already trading at crisis levels and will resist further decline. High inflation expectations and inflation, which is close to the Bank of England target, should for the time being keep the central bank from deciding to soften the policy," say Nomura analysts.
"Great Britain's exit from the EU without a deal is a risk, and it will certainly lead to the formation of new lows in sterling, but this will happen only in a few months, and we don't expect the market to lay a high premium for a hard Brexit until Parliament returns to work in September after the summer break," they added.
GBP/USD: the chances for a "soft" Brexit are rapidly decreasing, the pound has fallen to two-year lows
TheGBP/USD pair slipped to the lowest level since 2017 (to the level of 1.2420).
Several factors are playing against the British currency at once: this is a high probability of the implementation of a "hard" Brexit, and a moderate economic growth in the country, and the fact that the monetary policy of the Bank of England can move to a more "soft" course.
On the eve of the two candidates for prime minister, Boris Johnson and Jeremy Hunt, stated that even substantial concessions on the part of the European Union on the regulation of the Irish border may not be enough to ratify the "divorce" agreement. This heightened concerns that the new British government's stance on Brexit would be more rigid, which could lead to the breakdown of the London-Brussels talks and the withdrawal of the United Kingdom from the EU on October 31 without a deal.
According to analysts, the dynamics of the GBP/USD pair reflects the general mood of the market in relation to the pound.
In this regard, it is noteworthy that the British currency was unable to use even the positive statistics on the country's labor market today.
According to the National Statistical Office (ONS), the average salary (including premiums) increased by 3.4%, in March-May with an expected growth of 3.1%. At the same time, unemployment remained at the lowest from October-December 1974 - 3.8%.
The employment sector in the country remains one of the few that remains stable despite the constant stress caused by Brexit.
The futures market is already expecting a 50% chance of lowering interest rates by the Bank of England in 2019 due to the risk of Great Britain's chaotic exit from the EU, as the policy outweighed stronger than expected labor market data.
This month, the pound sterling hit a two-year low against the US dollar.
Analysts polled recently by Bloomberg report that the situation may worsen next month. Moreover, this is an established trend: the fall of the pound against the dollar in August has been noted over the past five years.
"In any case, we will have enough cause for concern in August, with the arrival of the new prime minister of Great Britain, as we are approaching October 31," the currency strategists of Royal Bank of Canada believe.
"Since the British Parliament has gone on summer vacation, the deadline for the UK's withdrawal from the EU is inexorably expiring," said MUFG analyst Lee Hardman.
ING Group believes that B. Johnson will become a leader who will not succeed in concluding a new agreement with Brussels. This will increase the likelihood that Great Britain will leave without a deal.
The main message of B. Johnson during the Brexit campaign was that this event would not have a negative impact on the British economy. However, the irony is that the ex-foreign minister may become the prime minister of the country just at the moment when the national economy will fully experience all the Brexit.
The decrease in USD rates is decided, but what do they think on Wall Street
The response of the market to the strong US retail sales was negligible; traders preferred to focus on the next comments of the Fed. Therefore, on Wednesday, the dollar was only able to fix the growth of the previous session just above the level of 97.
Speaking in Paris, Jerome Powell intervened in market expectations again, hinting at the risks of lowering inflation expectations, which requires a more flexible policy adjustment from officials. At the same time, the Federal Reserve persists in ignoring traditional fundamental data, showing its concern with leading indicators. After Powell's speech on Tuesday, the odds of a 50 bps rate cut increased to 31%. At the same time, the head of the Central Bank was able to convince the market that the Central Bank would be able to stimulate inflation, since the market metrics of inflationary expectations turned into growth from the end of June.
Thus, pressure on the American economy comes from trade relations with partners. Inflation expectations declined after the announcement of an increase in tariffs for Chinese goods. Powell has pointed out on this for more than once. It cannot be ruled out that the reaction of inflation expectations to the bottom was a "foresight" of the new cycle of mitigation of policy in response to the escalation of tariff tension. In this case, the Central Bank is led, as it responds to a false signal and ignores strong economic reports.
Be that as it may, it is difficult to consider a reduction in the rate of half a percent at once as a reasonable precautionary measure. The labor market and retail volume are growing quite confidently.
Next week, the ECB is expected to give a strong stimulus signal, which will reduce the risks of a further slowdown in growth abroad. This is one of the reasons for the Fed's concerns, along with the trade war. Friday's report on US GDP may contain a positive surprise, at least there are prerequisites for this. In this scenario, traders are unlikely to sell dollars.
Estimates and expectations of the world's largest banks about the Fed rate cut
The Goldman Sachs are waiting for the reduction of 25 basis points in July and another by the same amount until the end of this year. A similar opinion is shared by experts JPMorgan.
Everyone understands that the Fed is set to soften the policy in July, they write. The situation in the world remains alarming, business sentiment continues to deteriorate, and deflation signals from a slowdown in producer price pressure put pressure on corporate profits. The combination of these factors has a negative effect on the increase in capital expenditures in the world.
Representatives of Morgan Stanley and UBS predict an aggressive policy easing - immediately by 50 basis points without an additional reduction before the end of the year. In their opinion, the current situation requires decisive action. Over the past 12 months, the global economy has noticeably slowed down, aided by trade conflicts. US GDP also risks slowing growth.
Citigroup, on the other hand, forecasts a quarter percent decline in July and the same in September. According to them, a decrease of 25 basis points is a kind of compromise on the committee. Although, it is possible that some officials will vote to reduce by 50 basis points.
There is a consensus in Bank of America and Barclays. Jerome Powell made it clear that at the next meeting, the rate will be reduced regardless of statistics, they comment. The cost of lending will decline by at least 0.25% in July and another 0.5% by the end of the year.
CBI Urges Next UK PM To Act Fast To Get Economy Back On Track
The next UK Prime Minister should restore confidence and take action to bring the economy back on track, the Confederation of British Industry said in its Business Manifesto published Monday. Carolyn Fairbairn, the CBI's Director General called for a clear direction for the UK and to build a long-term vision that drives in investment and back business as a foundation of a growing, inclusive economy.
Brexit has stalled progress on the UK economy for three years. A Brexit deal remains a top priority for business, but a broader vision is needed, the lobby noted.
"Early signals matter. The UK is a fantastic place to do business but we must be honest - the reputation of our country has taken a dent in recent times," Fairbairn said.
"Our new Prime Minister has a real chance to inject a new lease of life into the UK economy and show the world we are open for investment."
The manifesto also called for fast action to show world that the UK remains a trusted place to do business and to build a compelling economic vision for the UK of the future.
BoJ Closely Examining Heightened Global Uncertainties, Says Kuroda
The Bank of Japan is carefully monitoring heightened uncertainties regarding the global economy as some nervousness has been seen in global financial markets, Governor Haruhiko Kuroda said Tuesday.
"We will carefully examine various risk factors, in addition to developments in economic activity and prices as well as financial conditions, and weigh the benefits and costs of the policy effects," Kuroda said in a speech at the International Monetary Fund.
He said Japan's economy is no longer in deflation as the central bank continued its powerful monetary easing.
"The positive annual CPI inflation has taken hold, and the economy is no longer in deflation in the sense of a sustained decline in prices," Kuroda added.
Inflation is in the range of 0.5-1.0 percent. The banker reiterated that the BoJ will persistently continue with easing in order to maintain the momentum toward achieving 2 percent inflation target.
However, Kuroda said it is not easy to continue with such powerful quantitative and qualitative monetary easing for a long time.
Further, he said the bank adopted yield curve control in 2016, aiming to control both short-and long-term interest rates of bonds.
"In exerting monetary easing effects stably for a long time, the Bank judges that yield curve control is a better framework in terms of both controllability and sustainability," Kuroda added.
Surprisingly, but a fact: amid the strengthening greenback, gold renews its perennial highs.
Since 2013, the precious metal has been trading in the range of $1050-1385 per ounce, and only recently strengthened expectations regarding easing of monetary policy by the Federal Reserve System (FRS) of the United States allowed quotes to come out.
The main obstacle in the path of "bulls" on XAU/USD is traditionally considered to be a strong dollar, but even now its position does not seem to be hopeless. What then is the matter?
If in 2014-2018, the US currency showed growth due to the tightening of the monetary rate of the Fed, then at present it remains stable primarily due to the weakness of competitors.
The Fed is signaling its intention to carry out monetary expansion for preventive purposes. The Bank of England in front of the "hawk" turns into a "dove". The ECB is also ready to ease monetary policy.
In conditions when it is difficult to find a strong currency, investors switch to other assets.
The historical highs of the S&P 500 index are undoubtedly impressive, but the higher it grows, the stronger the impression that this is a "bubble". The only driver of the rally is investor confidence in aggressively lowering the Fed rate. If the US central bank does not go in the wake of the market, the fall of the S&P 500 will be guaranteed. Bonds?
Under normal conditions, bonds act as an alternative to gold and take advantage of it in the form of interest income. However, when the volume of negative-yield bonds traded on the global market increases by leaps and bounds, and currently exceeds $13 trillion, investors start looking at the yellow precious metal in a completely different way. Buying gold seems to be the best choice for them. In fact, which is preferable: not having interest income or paying extra for the fact that you own bonds?
Is it any wonder, then, that in the conditions of only a formally strong dollar, the increasing risks of lowering the S&P 500 and the growing number of traded bonds with negative yields, investors prefer gold? Gold ETF reserves have already exceeded 74 million ounces - less than 18 million below the record high of 92 million ounces recorded in 2011.
"The vector of the monetary policy of key central banks seems to have changed, so we are optimistic about the prospects for the yellow precious metal," said experts from Citigroup. "
We expect the Fed to cut its interest rate by 25 basis points at the July meeting. At the same time, we do not exclude that the regulator can reduce it immediately by 50 basis points. The beginning of the decline in interest rates in the United States will be a positive event for the bulls on gold," they added.
According to Citigroup's forecast, in the third quarter the price of gold will average $1,425 per ounce, and in the fourth quarter - $1,450.
Producer prices in Japan were up 0.7 percent on year in June, the Bank of Japan said on Thursday - shy of expectations for 0.8 percent and down from the upwardly revised 0.9 percent gain in May (originally 0.8 percent).
On a monthly basis, producer prices eased 0.1 percent after sliding 0.2 percent in the previous month.
Individually, prices were up for transportation, real estate, advertising and leasing. Prices were steady at financial services and down for communication and information services.
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