After increasing ahead of Fed policy decision on Wednesday, gold weakened due to less dovish than expected Fed and uncertainty regarding its monetary policy path even though the central bank cut the rates by 25 basis point. In Fed statement, it said that US economic outlook remained strong despite increasing uncertainties while reiterating the Fed would act as appropriate to sustain economic growth. Following the meeting, Fed Chair Jerome Powell said the rate cut was designed as an insurance against ongoing risks while underlining the rate cuts would end “when we think we have done enough.” Besides, updated “dot plot” indicated no further rate cut was expected this year. In the meantime, Bank of Japan kept the rates on hold today and announced possible further easing would be discussed in the next meeting in October.
Gold prices increased up to $1,511 an ounce ahead of Fed statement yesterday but later on decreased below $1,500 due to uncertainty regarding monetary policy Fed would follow and median interest rate expectations forecasting no further rate cut this year.
As of 18:45 GMT+3, spot gold was trading at $1,498.70 an ounce while dollar index was down to 98.36. US 10-year Treasury yield was at 1.787.
DailyFX senior currency strategist Ilya Spivak said on Reuters that if Fed was right in its cautious approach that the world environment was not as dire as stimulus-hungry markets envisioned, this would mean less easing overall and gold looked vulnerable.
US Federal Reserve cut the rates by 25 basis point to 1.3/4-2 as expected on Wednesday. In its statement, it said economic activity continued to grow at moderate pace alongside with strong labor market despite ongoing uncertainties as well as weak business investment and exports while adding that inflation remained below target 2%. The Fed reiterated it would act as appropriate to sustain economic growth while stating that it would closely watch data regarding inflation and labor market conditions alongside with financial and international developments. The decision was made by approval of 7 out of 10 policymakers. Fed officials also had disagreements regarding further rate cuts as in its updated “dot plot”, 7 forecasted one more rate cut this year while 5 saw no further rate cut in 2019 and 5 was not in favor of the rate cut on Wednesday. So, median forecast indicates no rate cut this year.
Following the meeting, Jerome Powell stated the rate cut was designed as an insurance against risks regarding global growth and trade tensions. Pointing out strong labor market and inflation that is expected to return to target 2%, Powell said the situation that the central bank was facing could be addressed by moderate arrangements in federal funds rate. Powell stated there was no pre-course policy and they would assess meeting by meeting what kind of policy to follow while adding that the rate cuts would stop “when we think we have done enough.”
Regarding liquidity shortage lately in money markets, Powell said they would closely watch market conditions and whether there were enough reserves while underlining the Fed might resume organic balance sheet growth to ensure enough liquidity. Thus, Fed will take measures to intervene the markets as necessary, as it has done in the last two days, instead of quantitative easing. Due to repo rates rising up to 10% on Monday, Fed injected $53 billion on Tuesday and additional $75 billion on Wednesday to calm the rates down.
In the meantime, Bank of Japan kept the rates on hold today and stated the necessity of closely watching the chance of the economy losing its momentum to achieve target inflation 2% while announcing detailed assessment would be done whether to go for more monetary easing in its next meeting in October.
Mizuho Securities chief market economist Yasunari Ueno said on Reuters that steady yen following Fed and ECB easing gave room to the central bank to wait while adding yen would spike against US dollar as central banks were in competition for further easing. Yasunari underlined it would trigger further easing if yen were to rise above 100 against US dollar.