Spot gold soared nearly 5% this week to a fresh high of $1,766.46 an ounce since Aug. 18, as U.S. CPI cooled more than expected in October, raising hopes that the fastest price rise in decades is on the way. The U.S. dollar index plummeted by more than 3%, refreshing the low since August 18 to 107.095.
As of press time, spot gold rose 4.70% to $1,760.08 per ounce; the main COMEX gold futures contract rose 4.60% to $1,763.1 per ounce; the U.S. dollar index fell 3.32% to 107.108.
U.S. inflation cools in October
According to data released by the U.S. Department of Labor on Thursday (November 10), the annual rate of the U.S. overall CPI in October was 7.70%, lower than the expected value of 8%, and the previous value was 8.20%; the annual rate of the core CPI in October was recorded at 6.30%, It was 0.2 and 0.3 percentage points lower than the expected value and the previous value, respectively.
Market participants now see the Fed raising rates by at least 50 basis points at its December meeting, but less than a 20 percent chance of a fifth straight 75 basis point hike. Gold is seen as an inflation hedge, but rising interest rates increase the opportunity cost of holding gold as a non-yielding asset.
The Federal Reserve has raised interest rates by 75 basis points for four consecutive times, and has raised interest rates by 375 basis points since the beginning of the year. But it comes after a growing number of people said they were worried the Fed would eventually slow the economy sharply, leading to a downturn next year.
Chicago Fed President Charles Evans said the time was ripe for the Fed to slow the pace of interest rate hikes to avoid over-tightening monetary policy and further when risks became “less one-sided.”
Richmond Fed President Barkin said that the U.S. may be in the “back end” of the current inflation surge, “how high the Fed needs to raise interest rates to solve the problem is highly related to what everyone thinks is the plasticity of inflation, and supply chain or other factors. improvement, that’s an issue we’re trying to figure out.”
Boston Fed President Collins stressed the need to fight inflation, while also weighing the impact of the Fed raising rates too quickly. “In the next phase of policymaking, my focus is to move from raising rates quickly to determining where rates have to go.” She noted that the risks of inflation falling too slowly and the economy weakening too quickly are being balanced.
OCBC FX Strategist Christopher Wong said:“Lower-than-expected CPI data supports the Fed’s case for slowing rate hikes at its December meeting, which could translate into dollar selling pressure, providing a modest recovery window for gold. If the market remains optimistic, gold prices could rise sharply. “
Limitations of the Fed
While falling inflation is good news, core inflation is still more than three times the Fed’s 2% target, and given the persistent nature of rising inflation, the Fed cannot control some of the sources of high inflation, such as supply chain disruptions, labor shortages or Russia Ukrainian War. Some Fed officials signaled they were expected to extend restrictive policy measures.
Minneapolis Fed President Kashkari said it was “totally premature” to discuss any adjustments to the Fed’s current aggressively hawkish policies. Philadelphia Fed President Harker said that interest rates above 4% are considered the Fed’s restrictive policy stance. When the federal funds rate hits 4.5%, rate hikes may be paused.
Fed Chairman Jerome Powell said earlier this month that inflation “will be higher for a longer period of time” and that the Fed has “a long way to go” to fight inflation, even if it could lead to a recession. He also suggested that the peak in interest rates could be higher than policymakers had previously expected.
Michael Arone, chief investment strategist at State Street Global Advisors, said: “I take Chairman Powell’s words and he’s been telling the market that they need to keep raising rates. To me, that’s a sign that the Fed is still going to do multiple rate hikes.”
Expectations of a slower pace of Fed rate hikes put downward pressure on the dollar and in turn provided some support for dollar-denominated gold. But if investors, companies and consumers believe the Fed will continue to take high inflation seriously, they still won’t be aggressively long gold.
midterm elections
The 2022 U.S. midterm elections, which begin on Tuesday (Nov. 8), are still being counted. Markets expect the Republicans to at least retake the House of Representatives. That was enough to lead to a gridlock in Congress, all but blocking the passage of further spending plans from the Biden administration.
High inflation is one of the top issues driving American voters to decide how to vote, according to an exit poll conducted by EDITION Research. About 60 percent of voters said soaring gasoline prices had caused them financial hardship. About 50 percent of voters said their households were in worse financial shape than they were two years ago.
Shortly after Biden took office, both houses of Congress, controlled by Democrats, quickly passed a $1.9 trillion economic relief bill that included direct payments of $1,400 to most adults, as well as expanded unemployment benefits and new parenting taxes. credit. As an economic stimulus, it was successful, with employers adding more than 10 million jobs. But Republicans have accused the relief bill of being too aggressive and fueling runaway prices.
Damien Boey, chief macro strategist at Barrenjoey in Sydney, said: “If the U.S. Congress is deadlocked or the Republican Party wins (retaking both houses), fiscal stimulus next year will not be so easy, which means (Fed Chairman) Powell is likely to give up. Aggressive rate hikes.”
When people start to see data showing a pullback in inflation, expect the Fed to start to slow the pace of rate hikes. If it is confirmed that the Biden administration will be difficult to achieve in fiscal spending in the next two years, inflation expectations will further decline, and the huge pressure exerted on the gold market in the past few months will continue to be released, and gold has reason to rise.
Republicans could push President Biden to make tough policy concessions before approving a debt ceiling increase. Many Republicans believe the government needs to contribute directly to lowering inflation, and some are calling for sweeping spending cuts. And that’s not what President Biden is willing to accept.At a time when the economy could slip into recession next year, we could see extreme brinkmanship, economic dislocation and higher government borrowing costs. Combined with the possibility of a further easing of hawkishness by the Fed, the dollar could face some significant downward pressure in the second half of 2023.
Spot gold’s previous decline was reversed
On the daily line, spot gold has started a rally near $1,615, and the volatile downward trend since early March may be reversed. On the hourly chart, the price of gold has started an upward iii wave from $1,664, with the upper resistance looking at the 161.8% target at $1,770 and the 176.4% target at $1,780. Wave iii is a sub-wave of the up (i) wave that started at $1616.