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(Kitco News) – The gold market is ending a five-week losing streak, and while sentiment appears to be shifting, some analysts say the precious metal still faces a challenging environment next week.
August gold futures are looking to end the week with gains of more than 1%, last trading at $1,721.40 an ounce.
All eyes will be on the Federal Reserve next week as markets expect the US central bank to raise interest rates by another 75 basis points. Some currency analysts said that while the US dollar has fallen from its highest levels in 20 years, the aggressive stance of the Federal Reserve will continue to support the US currency.
“Amid the backdrop of a hawkish Fed and slowing global growth, we believe the dollar will resume broad-based strength soon,” said economists at Capital Economics in a report on Friday.
Mark Chandler, managing director at Bannockburn Global Forex, said that while gold prices have room to rise next week, the central bank’s decision could limit gains.
“Not only will the Fed likely rise by 75 basis points, but it will also signal that the adjustment is not finished. I imagine gold will struggle near $1750 and the 20-day moving average a little higher than that. [$1,752],” He said.
However, some analysts are of the view that the Fed’s tightening cycle has less impact on the US dollar and financial markets. Currency analysts at TD Securities see Wednesday’s decision as more neutral for the dollar as the market has been much hawkish.
“This meeting has much less weight compared to the last two meetings and the benchmark appears to be high to change the landscape in FX radically from a tactical point of view. However, we see little reason to undermine the resilience of the US dollar, although we don’t see much reason for it to rise above this meeting” .
In the face of mounting recession fears, some analysts said the Fed may be closer to the end of the tightening cycle, which would be downright bullish for gold.
“Gold prices are on the rise with global recession fears resetting interest rate hike expectations for all major central banks. Gold has started to act as a safe haven as weak economic growth will force many central banks to abandon their aggressive tightening plans,” he said. “Edward Moya, Chief Market Analyst at OANDA. Gold may find resistance at the $1750 level, but if it doesn’t, not much stands in the way until the $1800 level.”
On Friday, preliminary data from S&P Global Market Intelligence showed that activity in the US manufacturing and services sectors fell to a two-year low. The decline in activity reflects similar weakness in Europe.
“The market is sensing that the rate-raising cycle will soon be over due to the slowdown in rapid growth. The US Services PMI on Friday was shockingly weak and means the Fed will pause at 3% and likely drop in 2023. When these cuts really emerge In mind, “Gold will rise due to a weaker US dollar,” said Adam Patton, chief currency strategist at Forexlive.com.
Thursday, markets will be waiting impatiently to see if the US has fallen into a technical recession after the release of the first reading of the second-quarter GDP. Many economists dismissed the weakness in the first quarter as a trade imbalance. However, data from the Atlanta Federal Reserve shows GDP contracted by 1.6%, matching the decline in the first quarter. The traditional definition of a recession is two consecutive declines.
Bank of America said last week that it sees the US falling into a mild recession by the end of the year.
Another European crisis
Alongside the Fed’s monetary policy decision, analysts also said they will be watching the ongoing geopolitical uncertainty unfold in Europe. Italy plunged into political turmoil Thursday after Prime Minister Mario Draghi resigned following the collapse of the national unity government. The nation is expected to hold snap elections in the fall.
Meanwhile, economists continue to absorb the European Central Bank’s announcement of the Transfer Protection Instrument. The program will be used to purchase bonds from Eurozone members to ensure that all returns are in line and to avoid any splitting risks.
In an interview with Kitco News, John Hathaway, portfolio manager at Sprott Hathaway Special Situations Strategy, said Europe could be close to a sovereign debt crisis as the central bank continues to expand its balance sheet.
“Gold prices can easily fall back above record highs if any crisis occurs in the foreign exchange markets,” he said. “The next black swan will be related to the wild foreign exchange markets.”
Christopher Vecchio, chief market analyst at DailyFX.com, said he also sees an increased risk of a sovereign debt crisis in Europe. He added that in this environment, both gold and the US dollar would benefit.
“As long as there are concerns about the euro, there is room for gold and the US dollar to both be bullish,” he said.
data to watch
Economists are set to watch other economic data next week, including consumer confidence data from the US Conference Board, pending home sales and personal income and spending data.
Tuesday: Consumer confidence, new home sales,
Wednesday: Durable Goods Orders, Pending Home Sales, and FOMC Decision and Statement
Thursday: Q2 GDP, weekly jobless claims
Friday: Personal consumption, per capita income, personal consumption expenditure inflation
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