GOLD MARKET COMMENTARY – Gold price outlook appears constructive as end of U.S. rate hike cycle looms

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By David Brough

LONDON – The outlook for gold prices appears constructive after the U.S. Federal Reserve raised interest rates by 25 basis points on July 26 as expected, with the end of the U.S. rate hiking cycle coming into view.

Although Fed Chair Jerome Powell kept the door open for perhaps another rate hike in September, as part of the U.S. central bank’s strategy to control inflation, many analysts were divided over whether that would happen as the markets keep a close focus on U.S. economic data.

Gold prices ticked higher as many market participants had expected Powell to take a more hawkish stance in his comments after the latest rate hike.

After U.S. consumer price inflation slowed down to 3.0 percent in the year to June, the lowest level since March 2021, several analysts felt that the end of the rate hike cycle was in sight, and awaited Powell’s comments for clues as to the future direction of interest rates.

Thorsten Polleit, chief economist at Degussa, told Kitco News that the drop in money supply and tightening lending conditions in the United States meant that inflation would likely continue to slow. He added that he expected slower economic growth to lead the Fed to pause rate hikes.

“The very restrictive monetary environment suggests a slowdown in the economy, perhaps even an impending recession – because the U.S. economy can no longer stand high interest rates, to put it bluntly, any longer,” he said. “From this point of view, it seems quite likely to us that the high in the current interest rate cycle could have been reached.”

A climate of steadying and then falling U.S. interest rates, with rate cuts perhaps starting from next year, would be bullish for non-yielding bullion, and could signal another test to the upside of USD $2,000 per ounce.

Once sentiment sets in firmly that the U.S. monetary tightening cycle is over, conditions could be in place for a rally in gold prices.

The U.S. dollar softened after the latest U.S. rate hike, underpinning bullion prices as holders of alternative currencies such as the pound and the euro found dollar-denominated gold more affordable.

The European Central Bank is widely expected to raise rates by 25 basis points on July 27, possibly strengthening the euro further.

The pound could see short-term gains against the dollar as the Bank of England is expected to raise rates again next week despite the latest fall in inflation to 7.9 percent in the UK in the year to June, down from 8.7 percent in the year to May.

UK-based gold savers have benefited from a stronger pound against the dollar, but if recession fears in the UK grow in response to a long period of rising interest rates, sterling may eventually drop back.

(Disclaimer: Any opinions expressed in this article are solely those of the author and should not be considered as investment advice.)

GOLD MARKET COMMENTARY – Gold price outlook appears constructive as end of U.S. rate hike cycle looms