Price of Gold Fundamental Weekly Forecast – Strong US Economic Data Needed to Support Fed’s New Outlook

Gold futures plunged over $100 last week, hitting their lowest level since April 29, after the U.S. Federal Reserve signaled it might raise interest rates sooner than expected. The news drove up U.S. Treasury yields and consequently the U.S. Dollar.

Rising yields tend to increase the opportunity cost of holding bullion, dulling its appeal as an investment. A stronger U.S. Dollar tends to weigh on foreign demand for the dollar-denominated asset.

Last week, August Comex gold futures settled at $1769.00, down $110.60 or -5.88%.

Federal Reserve Moves Up Its Timeline for Rate Hikes on Inflation Concerns

The Federal Reserve last Wednesday considerably raised its expectations for inflation this year and brought forward the time frame on when it will next raise interest rates, CNBC reported.

However, the central bank gave no indication as to when it will begin cutting back on its aggressive bond-buying program, though Fed Chairman Jerome Powell acknowledged that officials discussed the issue at the meeting.

“You can think of this meeting that we had as the ‘talking about talking about’ meeting,” Powell said in a phrase that recalled a statement he made a year ago that the Fed wasn’t “thinking about thinking about raising rates.”

As expected, the policymaking Federal Open Market Committee unanimously left its benchmark short-term borrowing rate anchored near zero. But officials indicated that rate hikes could come as soon as 2023, after saying in March that it saw no increases until at least 2024. The so-called dot plot of individual member expectations pointed to two hikes in 2023.

Though the Fed raised its headline inflation expectations to 3.4%, a full percentage point higher than the March projection, the post-meeting statement stood by its position that inflation pressures are “transitory.”  The raised expectations come amid the biggest rise in consumer prices in about 13 years.

Weekly Forecast

The steep drop in gold prices last week was clearly not what investors expected. The central bank is now signaling that rates will need to rise sooner and faster, with their forecasts suggesting two hikes in 2023. This change in stance rattled long investors since it waivers a little from the Fed’s recent claims that the recent spike in inflation is temporary.

Now that the Fed has tipped its hand and showed it willingness to adjust policy to meet current market conditions, U.S. economic reports take on greater importance. The reports are going to have to continue to show a strengthening economy in order to support some of the Fed’s reasons for shifting the next rate hike forward.

This week, traders will get the opportunity to react to Fed Chair Jerome Powell’s testimony on Tuesday at 18:00 GMT.

On Wednesday, traders will be eyeing the Flash Manufacturing PMI and Flash Services PMI reports. Durable Goods come out on Thursday. Friday is a big day with reports on the Core PCE Price Index, Personal Income, Personal Spending and the revised University of Michigan Consumer Sentiment report.