Gold in historic bearish cycle as USD maintains Forex king’s status

Producer price pressures are still too strong to delay any Fed’s future rate hikes. The US dollar could continue to receive support from the recession-linked fears in and outside the United States. Gold has been pressured on Thursday due to a rising US dollar and hawkish sentiment surrounding the Fed which is widely expected to raise the federal funds rate by 75 basis points at its July 26-27 meeting. The Fed has an inflation problem on its hands and the USD will remain the king of currencies.

The precious metal trades at $1,710.10 per ounce, that is to say 1.47% lower, sliding from the earlier $1,736.60 high to a low of $1,697.64 and both the technical and fundamental bias have generally been to the downside.

The break in daily market structure and prospects of a strong US dollar as well as higher yields, which gold does not offer to investors, have weighed on the precious metal. The greenback has tended to strengthen both when the US economy outperforms its peers and also when the US economy looks weak.

There are concerns that the Fed is caught between hammer and anvil, but the price is being weighed into pre-pandemic levels and there are risks of a significant capitulation event in precious metals. Firstly, soaring US inflation surprised the markets in June with the jump of annual inflation to a new four-decade high of 9.1%, up from 8.6% in May.

The market expects that the Fed will be in no rush to signal any end of its aggressive rate hikes and is pricing in steeper hikes of 100bs for not only in July but September’s meeting as well. At the June FOMC meeting, Chair Jerome Powell stated he would need “compelling evidence” that inflation is easing for the Fed to change course, which he defined as “a series of falling monthly inflation readings”.

The Fed is clearly more worried about inflation expectations to any levels that could be much more difficult to handle. Global recession could stem from no other than the second largest economy in the world, China which is battling with Covid six weeks after Shanghai fully lifted lockdown, China’s biggest city is again encountering a resurge of infections.

The worries of miss official growth forecast this year do mix with recession fears for both the Eurozone and the US. This is expected to continue to play into the hands of the US dollar bulls. The US dollar smile theory has been playing out since the outbreak of Covid and is sucking up the world’s capital.

The US dollar’s safe haven function also stems from its use as an invoicing currency and from the significant amounts of USD-denominated debt issued by non-US residents. A times of uncertainty, market participants take action to secure their access by rushing to USDs. In turn, the pull on the gold price is likely to persist, at least until the Fed’s front-loaded policy tightening cycle is near conclusion.