Price of Gold Fundamental Weekly Forecast – Direction Will Be Determined by ECB Aggressiveness

If you watched the price action in gold from Monday to late Thursday, you were likely to conclude that investors were content with holding prices in a range until the Fed interest rate decision on July 31. The market remained underpinned by expectations of a 25-basis point rate cut by the U.S. Federal Reserve, and capped by low expectations of a 50-basis point rate cut by central bank policymakers.

Last week, August Comex gold futures settled at $1426.70, up $14.50 or +1.03%.

That was until late Thursday afternoon when New York Federal Reserve President John Williams made dovish comments that spiked the probability of a more aggressive half-a-point rate cut to 71.5%, according to the CME. The news drove August Comex gold to a multi-year high at $1454.40.

Gold prices began to collapse when New York Fed officials downplayed Williams’ remarks and the Wall Street Journal reported the Fed was not likely to make the 50-basis point rate cut, but would instead cut rates 25-basis points, while standing ready to continue to cut rates, if necessary, in the future. At the end of the week, the chances of an aggressive rate cut fell to 21.5%. Gold prices could drift lower this week if this probability figure continues to drop.

Weekly Forecast

The key event that will likely drive the price action in gold this week is the European Central Bank’s (ECB) monetary policy decision on July 25. This is because it will also impact the U.S. Dollar Index. Since gold is a dollar-denominated investment, its direction will be determined by the movement in the greenback.

According to reports, the ECB is poised to unleash fresh stimulus to battle the deepening economic disorder gripping the Euro Zone.

Traders expect ECB policymakers to announce an interest rate cut or at least change guidance to tee up stimulus at the central bank’s next meeting in September. The catalyst behind the bank’s aggressive actions is stalling growth in the Euro Zone caused by a factory slump that is expected to intensify. Furthermore, forecasters are looking for slower global growth.

An aggressive move by the ECB could drive the Euro through its recent low at 1.1107. This could drive the U.S. Dollar to a new high for the year which would likely drive down demand for gold.

At this time, we don’t know if Euro traders have priced in the aggressive stimulus move so the market could be vulnerable to whipsaw price action. We are certain the Fed will cut rates at least 25-basis points on July 31, but there are some who still think the central bank may cut 50-basis points because it may want to make a statement to investors that it is serious about propping up the U.S. economy.

We’re looking for heightened volatility this week. If the dollar rises sharply higher then gold is likely to be pressured. If the dollar weakens then gold will be underpinned.