Credit: Bloomberg
The Federal Open Market Committee held the federal funds rate in a range of 5.25% to 5.5% on Wednesday, a level they have maintained since last July. Federal Reserve Chair Jerome Powell signaled central bank officials are on course to cut interest rates in September unless inflation progress stalls, citing risks of further labor-market weakening.
What's next?
Powell's statement last night makes the path to rate cuts clearer in September. However, the Fed will still need more evidence from data like Non-farm Payroll (NFP), Personal Consumption Expenditures (PCE), Consumer Price Index (CPI), and the unemployment rate to be more confident about the timing and magnitude of rate cuts.
We can see that CPI is successfully controlled and is currently at the lowest rate year-to-date.
As mentioned by the Fed, labor-market weakening is now more worrying and needs more concern as it has increased to the highest rate year-to-date.
Based on these two basic data points, it seems that a rate cut in September is quite certain. However, it won't have huge effect on gold prices as it has already been priced in. A rate cut in September has been expected for a few months, and gold has been traded with that expectation in mind.
Labor-related data like the unemployment rate and NFP are more concerning as they will determine the magnitude and timing of rate cuts. Let's think this through. If the data weakens significantly, there are two possibilities. First, the data weakens more than what the Fed expected but is not severe. Second, the data weakens more than what the Fed expected and causes a recession.
In the first scenario, it will be bullish for gold prices as lower interest rates and bond yields make gold a more attractive investment option. Additionally, a weaker USD compared to the Malaysian Ringgit (RM) will provide opportunities for us as Malaysians to buy gold at a more lower prices. In the second scenario, at least in my opinion, gold will be bearish as during a recession, savings and fixed income will be prioritized, leading to lesser demand and a drop due to the burst of the priced-in bullish gold price expectation.
If the data becomes stronger, it will create more chaos in the market as it will raise uncertainty on whether rate cuts will be delayed if the labor market strengthens and the Fed aims to lower inflation further. In this case, I think it will tend to be bearish for gold prices and increase volatility.
Given the weekly chart of Gold (US$/OZ), a strong support level is located around 2294.86. The current gold price is around 6% above this support and is expected to move higher and close at a new high this week if the NFP and unemployment rate data are favorable. In my opinion, gold is still moving strong, and it's likely that the US can achieve a soft landing where the Fed will cut rates with acceptable labor-related data, continuing the bullish market condition.
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