On July 24-25, gold experienced minimal overall volatility, with daily fluctuations of around $10. The market eagerly awaited guidance from the Fed's Interest Rate Meeting.
A 25 BP hike by the Fed in July has already been priced in by the market. According to CME Group's FedWatch tool, the current market probability of a 25 BP rate hike in this meeting has risen to 98.9%.
Source: CME
Looking back at the recent economic data released in the United States, market expectations for the final interest rate hike this year have cooled. Firstly, there was a lower-than-expected growth in the US retail sales month-on-month following the unexpected cooling of inflation. According to data from the US Department of Commerce, retail sales in June grew by 0.2%, below the expected 0.5% and the previous value of 0.3%. However, core retail sales, which exclude automobiles, gasoline, building materials, and food services, increased by 0.6%, indicating that consumer resilience in the US remains intact.
However, looking at the overall performance of the July PMI data, the US economic activity doesn't seem as active as anticipated. The S&P Global data shows that the preliminary manufacturing PMI for July was 49, significantly higher than the expected 46.2 and the previous value of 46.3. The services PMI was 52.4, lower than the expected 54 and the previous value of 54.4. The US manufacturing sector is still contracting, and the expansion momentum of the services sector has also slowed down.
Considering the previous statements from Fed officials indicating that future interest rate decisions will be based on economic data, the current signs of weakening economic activity in the United States may lead to a more dovish monetary policy stance by the Fed. Additionally, some market investors have already started anticipating a rate cut schedule by the Fed in 2024.
Furthermore, it appears challenging for central banks like the Bank of England and the European Central Bank to slow down or halt their hawkish pace of interest rate hikes in the short term, which could exert some downward pressure on the US dollar. Taking into account these factors, it is possible that gold may experience a bullish trend in the medium to long term.
What Impact does a Rate Hike Have on Gold in the Short Term?
Looking back at this year, gold's performance after the Fed's rate hike decisions has been mixed. However, after the most recent 25 BP hike in June, both the USD Index and gold fell, with gold experiencing a slight decline of 0.12%. Based on past experience, if the Fed raises rates by 25 BP in July, we expect gold to potentially rise initially and then fall in the short term.
