The gold market is still not far from the $1850 level and could remain very subdued until next week. The FOMC meeting will take place next week and the announcement on policy is expected at its conclusion Wednesday afternoon. The three-week holding pattern that gold has been stuck in could continue until that day. Prices have been stuck in neutral as investors may
be awaiting more clarity from the Federal Reserve on its plans moving forward.
The CME Fedwatch tool currently shows a greater than 90% likelihood the Fed will again raise rates by 50-basis points next week. The Fed has suggested that it will likely raise rates by 50-points at its next two consecutive meetings while markets have priced in the Fed doing so at the next three consecutive meetings. What’s at stake with next week’s meeting? A lot. For starters, the Fed will need to keep its credibility and thus hike accordingly as it has suggested it will do. Although there may be some significant knee-jerk reaction to the Fed announcement, it is also very important for investors to remain focused on the bigger picture.
Friday’s Consumer Price Index data may shed some light on the bigger picture. Inflation is expected to show a year-over-year rise for May of 8.2%. This would indicate a slight drop from April’s reading of 8.3% and could add more credibility to the notion that inflation may have already peaked. Should the figure come out higher than expected, however, the Fed could see it come under serious pressure to hike even more aggressively and drain liquidity from the system. In such a scenario, markets would be unlikely to take the news well and could find themselves being sold heavily. In that case, gold could stand to benefit as investors may look for perceived safe havens in which to put capital to work in. Even if the CPI data does suggest inflation has peaked, no one knows how long it may take for prices to back down. Inflation could be problematic for some time. Any missteps by the Fed during this period could be catastrophic and could lead to an extended period of stagflation or even a recession.
The Fed has a lot to deal with currently and is on very fragile footing. Having backed itself into a corner, the central bank may look to leave its options as open as possible while it tries to navigate the rough economic waters. Adding to the Fed’s problems, the war in Ukraine is showing no signs of a slowdown as of yet and the stock markets remain in downtrends despite some recent rallying.
The $1800 and $1900 levels remain key for the bulls and the bears. Whichever way prices eventually do breakout, they are likely to continue moving in that direction for the months ahead. The dip has been purchased so far, however, the bulls just need a little more strength to establish a fresh trend higher.