Gold Price Rises Amid Expectations of Fed Rate Hike Pause

The gold price (XAU/USD) is on the rise as investors anticipate the Federal Reserve (Fed) will raise interest rates by 25 basis points (bps) to the 5.25%-5.50% range. However, market participants are hopeful that this rate hike in July will be the last one for the year, leading to a pause in the current tightening cycle.

This sentiment is bolstered by easing fears of a global recession, upbeat US Consumer Confidence, and expectations of the Fed announcing an interest rate peak. As a result, the US Dollar Index (DXY) is under pressure, with investors anticipating that Fed Chair Jerome Powell will take a less aggressive stance on inflation. The US GDP numbers for the second quarter, scheduled to be released on Thursday, are also keeping investors on edge.

The widely expected 25 bps interest rate hike would push rates to 5.25%-5.50%. However, doubts linger over guidance for September’s interest rate policy due to easing inflationary pressures. According to the CME Group Fedwatch tool, interest rates are expected to peak around 5.25%-5.50% and remain steady by year-end. The Fed’s current priority is to bring down inflation to 2% steadily, and they are not expected to discuss rate cuts for the rest of the year.

Despite a still tight labor market, the headline Consumer Price Index has decelerated to 3.0% and core inflation has dropped below 4.8%, indicating resilience in the US economy. Fears of a recovery in US inflation persist as companies continue to hire new talent and offer higher wages to offset labor shortages, leading to consistent consumer spending and elevated core inflation.

The upward revision in global growth forecasts by the International Monetary Fund (IMF) for 2023 to 3.0% has also contributed to the pressure on the US Dollar Index and weighed on safe-haven assets. Additionally, a survey by the National Association for Business Economics (NABE) showed that 71% of respondents expect a 50% or lower chance of a recession in the United States.

After the Fed’s interest rate decision, investors will turn their attention to the second-quarter Gross Domestic Product (GDP) data and Durable Goods Orders for June, set to be released on Thursday. The US economy is expected to have expanded at an annualized rate of 1.8% in Q2, slightly lower than the 2.0% growth seen in Q1. Durable Goods Orders are also projected to expand at a slower pace of 1.0%, compared to 1.8% a month earlier.