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The persistent inflation narrative is forcing markets to price in more aggressive central banks, with next week's key announcements from the Federal Reserve and the Bank of England on everyone's radars.
All of the gold's gains above $1,800 an ounce continue to be capped. After breaching this key resistance level this week, the precious metal once again saw renewed selling pressure as profit-takers took the metal down around 1% on the week.
"Short-term, the market is anticipating a November taper. I suspect the Fed will trigger some downside in gold," TD Securities head of global strategy Bart Melek told Kitco News.
The surprise move by the Bank of Canada this week to end its quantities easing program has markets on edge, Melek added.
"Gold has been trading in this wide range for a while. We went into $1,806, but now we are trending lower again. Based on the Bank of Canada's hawkish surprise, many people are projecting the Fed to do something similar at some point," he said. "People will be positioning for a hawkish surprise from the Fed."
The Federal Reserve's interest rate announcement is scheduled for Wednesday, with markets projecting for the central bank to begin tapering its $120 billion monthly asset purchases.
According to the previous Fed meeting minutes, "gradual tapering" would begin in November and in June. The CME FedWatch Tool is also forecasting a 47% chance of a rate hike come June and a 40% chance of a second rate hike come September.
"A taper announcement looks inevitable now that officials, by and large, agree that 'substantial further progress' has been made on both the inflation and employment mandates. Moreover, the minutes of the September FOMC meeting outlined a potential timetable that starts in November with asset purchases reduced by $15b each month, split $10b Treasuries and $5b Agency Mortgage-Backed Securities," said ING chief international economist James Knightley. "We don't think interest rate increases will be far behind and markets seem to agree with earlier interest rate hikes being anticipated across developed markets."
Central banks around the world are starting to tighten as well, which is shrinking the global stimulus. But markets might be a bit too aggressive in anticipating rate hikes in the U.S., OANDA senior market analyst Edward Moya pointed out.
"We have to remember that before the Fed can start rate hikes, they need to see unemployment rate continue to fall. The Fed can't raise rates quickly. You are going to see fed Chair Powell remain extremely cautious on rate hikes. With all of the fiscal and monetary support already out there, the biggest fear would be a policy mistake. The Fed can't let a lot of those efforts go to waste," he noted. "The Fed doesn't want to do anything that derails this recovery. If they were to turn hawkish, it would disrupt their goal as far as the labor market recovery."
In the meantime, it's been a mixed bag of macroeconomic data for gold this week. But one narrative that remains constant is the fear of runaway inflation. And it is not just a problem in the U.S. or Europe anymore — it is a global issue, said Moya.
Friday morning, markets digested euro zone inflation hitting a new 13-year high in October, with the headline number rising 4.1%.
"What stood out this morning employment cost index. That had the largest gain since 2001. It is apparent that inflation worry is not easing any time soon," Moya told Kitco News. "Right now, the market is on edge as far as what will the Fed do next week. You have a market that is a little bit unclear on whether inflation will drag down growth over the next couple of quarters. As far as gold goes, it struggled to attract investors. The market is really having trouble justifying increasing safe-haven positions just yet."
Gold needs to hold this level
There is a risk of a gold selloff following the Fed announcement next week, noted Moya, adding that the precious metal could see increased volatility and a choppy trading environment.
Gold has been trading in a wide range for several months — $1,680-$1,840 an ounce. Right now, $1,750 is a key support level that must hold, he added.
"You are probably going to see gold continue to consolidate leading up to taper day. There could be a dip that emerges post-Fed. That's when you buy gold. We could see one last major push lower next week. If there was a major move lower to $1,720, that's when you would consider scaling into gold. If the dip is bought, it won't be hard to recapture $1,800 an ounce," Moya explained.
If gold fails to hold $1,784 and then tumbles below $1,745, things "could get ugly" for the precious metal, said Walsh Trading co-director Sean Lusk. "If we don't hold, we could see $1,680," Lusk said.
Data to watch
Aside from the big Fed announcement on Wednesday, the Bank of England is scheduled to release its interest rate decision on Thursday
"Bank of England poised to hike interest rates for the first time since Covid-19," Knightley said. "Markets are fully pricing the first 15bp rate rise from the Bank of England next week. Economists are less sure, and the consensus is relatively split. But the message from Governor Andrew Bailey and his colleagues has strongly hinted that the Bank doesn't want to hang around."
Another important release to monitor next week will be the U.S. October employment data, with market consensus calls projecting for an additional 413,000 positions to have been added and for the unemployment rate to have dropped to 4.7%.
Other macroeconomic data to keep an eye on are the U.S. ISM Manufacturing PMI on Monday, ADP nonfarm employment and ISM non-manufacturing PMI on Wednesday, as well as jobless claims on Thursday.
By Anna Golubova
For Kitco News
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