Gold price forecast: neutral
- Gold rises for the weekend after Powell does not give a clear cone signal
- XAU /USD looking forward to next week NFP report for the next risk event
- Geopolitical risks and broader risk trends to drive prices so far
Gold prices rose for the weekend after Federal Reserve Chairman Jerome Powell failed to provide a clear timetable for balance sheet tightening. Some expected Mr Powell to set a date by which the central bank would begin to reduce its weekly rate of asset purchases, a move widely seen as a precondition for rising interest rates. Although rising interest rates will continue to depend on progress towards the Federation’s employment targets.
This signal is now likely to come in September FOMC meeting. Markets, with a growing chorus of Fed members, call for a convex change in monetary policy. One prominent member of the FED – although not a FOMC voter – Robert Kaplan is confident that the September humiliation signal is appropriate. The president of the Dallas Federal Reserve said, “When we get to the September meeting, it would be good for us to announce a plan to adjust purchases …”
The central bank appears to be cautious and taking choreographic steps to start reducing weekly asset purchases. The target is likely to avoid the narrowing that already occurred in 2013, when a sudden rejection of reverse purchases surprised traders and sent a volatility shock through the markets. Gold fell gradually during the boom, when treasury interest rates rose sharply and a US dollar stated the yellow metal complaint. Such an approach is likely to soften the downside of gold, although the tighter monetary environment remains poorly predictive of a non-asset-bearing instrument.
The week’s recent highs prolonged the rise in prices earlier in the week as the geopolitical shock boosted the yellow metal’s safe haven. The terrorist attack in Kabul killed dozens on Thursday and injured many people, including 13 US officials.
Markets could be on the brink of Kabul’s heightened security situation as a massive US-led international air transport operation continues. U.S. defense officials have warned that another difficult attack is likely. If this happens, especially in the event of a mass accident, it could increase gold even further.
The NFP focuses on gold traders
The Fed has made it clear that progress in the labor market is key for the central bank to move forward with tightening policies. Nevertheless, the August Non-Agricultural Payroll Report (NFP) is likely to be the next major event for gold. Analysts expect that figure will exceed 750,000, more jobs will be added, and the unemployment rate will fall from 5.4% to 5.2%, according to a Bloomberg study.
A better-than-expected report is likely to lead to tightening and reduced stakes. This could lead to a rise in the US dollar along with Treasury yields, which would affect gold prices. Alternatively, a weaker report could allow gold to rise more. In the meantime, gold prices may depend on its safe haven, which in the meantime focuses on geopolitical risks and broader risk directions.
– Written by Thomas Westwater, DailyFX.com analyst
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