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(Kitco News) – The gold market is ending a five-week losing streak and while sentiment appears to be changing, some analysts say the precious metal will still face a challenging environment next week.
August gold futures are looking to end the week with a gain 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 hike interest rates another 75 basis points. Some currency analysts have said that even though the US dollar has fallen from its recent 20-year highs, the Federal Reserve’s aggressive stance will continue to support the greenback.
“Amid a hawkish Fed and slowing global growth, we believe the dollar will regain broad-based strength before long,” economists at Capital Economics said in a report Friday.
Marc Chandler, managing director of Bannockburn Global Forex, said while gold prices could rise further next week, the central bank’s decision could limit gains.
“Not only will the Fed most likely increase 75 basis points, but it will also signal that the adjustment is not over. over 20 days is just above. [$1,752],” he said.
However, some analysts consider the Federal Reserve tightening cycle to have less impact on the US dollar and financial markets. Currency analysts at TD Securities see Wednesday’s move as more neutral for the greenback, as the market has priced in a lot of hawkishness.
“This meeting carries much less weight compared to the last two and the bar seems high to radically change the FX landscape tactically. That said, we see no reason for USD resilience to be undermined, even if we see little reason for it to soar higher from this meeting,” the analysts said.
Amid growing recession fears, some analysts have said the Federal Reserve may be closer to the end of its tightening cycle, which will be downright bullish for gold.
“Gold prices rise as global recession fears reset rate hike expectations for all major central banks. Gold is starting to act as a safe haven as weaker economic growth will force many central banks to abandon aggressive tightening plans,” he said. Edward Moya, Senior Market Analyst at OANDA. “Gold might find resistance at the $1750 level, but if not, little will get in the way up to the $1800 level. “
On Friday, preliminary data from S&P Global Market Intelligence showed activity in the U.S. manufacturing and service sectors fell to its lowest level in two years. The decline in activity reflects similar weakness in Europe.
“The market senses that the rate hike cycle will end sooner due to the rapid slowdown in growth. , gold will surge on USD weakness,” said Adam Button, chief currency strategist at Forexlive.com.
On Thursday, markets will be waiting anxiously to see if the United States has fallen into a technical recession after the release of the first reading of second-quarter GDP. Many economists dismissed the first-quarter weakness as a trade imbalance; however, data from the Atlanta Federal Reserve shows GDP contracting 1.6%, matching the decline in the first quarter. The traditional definition of a recession is two quarters of consecutive declines.
Last week, Bank of America said they see the United States falling into a mild recession by the end of the year.
Another European crisis
Along with the Federal Reserve’s monetary policy decision, analysts also said they would monitor the ongoing geopolitical uncertainty unfolding in Europe. On Thursday, Italy descended into political turmoil after Prime Minister Mario Draghi resigned following the collapse of his government of national unity. The nation is expected to hold snap elections in the fall.
At the same time, economists continue to digest the European Central Bank’s announcement of its transport protection instrument. The program will be used to buy bonds from Eurozone members to ensure that all yields are aligned and to avoid any risk of fragmentation.
John Hathaway, portfolio manager of Sprott Hathaway Special Situations Strategy, said in an interview with Kitco News that Europe could be close to a sovereign debt crisis as the central bank continues to expand its balance sheet.
“Gold prices could easily rally above record highs if there is a crisis in the currency markets,” he said. “The next black swan out there will be connected to the unruly foreign exchange markets.”
Christopher Vecchio, senior market analyst at DailyFX.com, said he also saw a growing risk of a sovereign debt crisis in Europe. He added that in this environment, gold and the US dollar will benefit.
“As long as there are concerns about the euro, there is room for both gold and the US dollar to rise,” he said.
Data to monitor
Other economic data economists will be watching next week include US Conference Board consumer confidence, pending home sales and personal income and spending data.
Tuesday: Consumer confidence, new home sales,
Wednesday: Durable Goods Orders, Pending Home Sales, FOMC Decision and Statement
Thursday: Advance Q2 GDP, weekly jobless claims
Friday: Personal consumption, personal income, PCE inflation
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