Is the hawkish sentiment about to peak? Here is the follow-up to the price of gold after the Fed-linked liquidation this week

(Kitco News) After losing more than $ 35 this week in response to more aggressive Federal Reserve meeting minutes, hawkish sentiment could be at its peak, analysts say. And that’s a positive signal that gold bulls are watching closely.

The big news that rocked the gold market this week was the minutes of the December Fed meeting, which indicated that a “tight” US labor market and problematic inflation may require more rate hikes. fast and a reduction in the balance sheet.

“Participants generally noted that, given their individual outlook for the economy, labor market, and inflation, it might become warranted to raise the federal funds rate earlier or at a faster rate than that. that the participants had anticipated, “said the minutes. “Some participants also noted that it might be appropriate to start shrinking the size of the Federal Reserve’s balance sheet relatively soon after starting to raise the federal funds rate.”

Analysts have pointed out that this view may already be dated, given the increase in omicron-related cases in December and January.

“Omicron is having an impact. We’re already starting to see it in the jobs data,” TD Securities Global Strategy Manager Bart Melek told Kitco News.

Non-farm payrolls in the United States rose only 199,000 in December, well below consensus estimates of 400,000. November data has been revised to 249,000 added positions. Meanwhile, the US unemployment rate fell to 3.9%, beating the market consensus in favor of a drop to 4.1%.

“Today was a big disappointment. But despite weak employment, the relative consensus is that there are still inflationary pressures. Gold may still rally a bit in the first quarter, another $ 40 at $ 50. But then gold is likely to slide lower, “Melek said.” There is no guarantee that the Fed will become restrictive. The market thinks the Fed will act decisively, but I’m not sure they can. “

In light of the changes in macroeconomic data and the situation at omicron, this week may have marked a peak in perception of the Fed, Phillip Streible, chief market strategist at Blue Line Futures, told Kitco News.

“Gold will recover from this massive selloff. We are using this correction to buy gold again. Right now, it is trading in the lower end of its range. price levels. But we still don’t. We have a great catalyst to drive gold up significantly. We are, however, at the top of the hawkish trend, “Chief Market Strategist Blue told Kitco News. Line Futures, Phillip Streible.

The question markets will worry about going forward is how many rate hikes can the Fed commit in 2022?

“Wall Street now has a hard time figuring out what the neutral rate will be. A few rate hikes are already slated for 2022, but the question everyone is asking is whether some of the balance sheet runoff will eventually replace some of the future rate hikes, ”said Edward Moya, OANDA’s senior market analyst.“ Gold has had a bad week, but it could have been a lot worse considering that the 10-year Treasury yield is increased from 1.53% to 1.75%. “

Moya considers $ 1,770 an ounce a good level of support for gold next week. As of this writing, February Comex gold futures were trading at $ 1,796.90, up 0.43% on the day.

Longer-term factors are still supporting the rise in gold prices, noted Everett Millman, precious metals expert at Gainesville Coins.

“Even if interest rates rise, high inflation still means real rates are negative. It’s positive for gold,” Millman said. “Also, over the past two cycles of rate hikes, gold has performed very well at the start of these hikes. We might see a repeat of this when the Fed begins to hike rates later this year. should bring gold closer to $ 1,900. “

Data to monitor

Next week, one of the macro releases to watch closely will be the latest US inflation figure, which is expected to be released on Wednesday. Market consensus calls predict that the consumer price index will rise to 7% on an annual basis in December.

“Next week’s numbers should show the headline CPI is above 7% yoy, quickly approaching a 40-year high – with a policy rate well above 5% yoy. that intensify the pressure on the Fed to start rate hikes, ”said ING chief international economist James Knightley.

In addition, the US PPI and jobless claims, forecast for Thursday, as well as US retail sales on Friday, will be decisive.

Markets will also focus on the appointment hearing of Fed Chairman Jerome Powell to the US Senate Committee on Banking, Housing and Urban Affairs. The testimony is scheduled for Tuesday.

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Carol N. Valencia