Fed’s meeting will be decisive for gold price

Gold price falls back into the hands of the bulls following the ECB’s rate policy decision. The Gold Index is now at a critical stage in the bearish cycle where a significant correction could play out. Next week’s Fed meeting will be very important for rate and gold traders. Gold price is higher by 1% in midday New York trade and has recovered from the fresh lows of $1,680.93 after sliding from $1,718.39 to Thursday’s highs.

The precious metal was pressured even as the US dollar weakened early on Thursday, with the ICE dollar index last seen down below the 107 figure but in the middle of the day’s range of 106.415 and 107.323. The day has been turbulent due to the European Central Bank that raised interest rates for the first time in more than a decade as it seeks to tame inflation.

The ECB took the well-telegraphed plunge and raised rates. Seeking to tame inflation, the ECB had for weeks flagged a 25 basis point hike, until earlier this week, when it was reported that the central bank was weighing a bigger move.

On Thursday, when the central bank hiked by 50bps and also announced a bond protection plan, called the Transmission Protection Instrument, designed to cap the borrowing costs across the Eurozone to help heavily indebted countries like Italy.

The outcome for XAUUSD was bullish despite the two-way trip in the euro and US dollar. Gold rallied from the day’s lows and the bulls committed to the upside, buying the dip throughout the hours ensuing the ECB event.

The two-year US Treasury yield was down to a low of 3.121% while the yield on 10-year Treasury notes fell to 2.917% which is back into the middle of the range for July as investors get set for the Fed interest rate decision on July 27 in which it is largely expected to hike rates by 75 basis points.

The fed would also be expected to continue hiking rates by at least 50 bps hikes at each meeting in the remainder of the year. This would raise the target range for the federal funds rate to 3.75-4.00% by 2023 which is more than indicated by the FOMC’s dot plot (3.4%) and futures markets (3.55%).

As for gold price, while today’s surprise 50bp hike from the ECB has helped prices pare their losses as the USD weakens, analysts argue that the liquidation vacuum in gold will persist. Risks for a significant capitulation event are rising because prop traders have overtaken money managers as the dominant speculative force in gold markets.