After falling to as low as $1,333 on Monday, gold prices recovered due to weakening dollar ahead of Fed’s two-day meeting however dollar index also recovered after President of European Central Bank Mario Draghi stated monetary policy ease was one of the tools that could be used which also helped yellow metal to keep its gains. After Fed’s meeting due to end on Wednesday, a rate cut is unlikely to be announced but economists expect a statement that signals a rate cut possibly in July. In the meantime, there are worries that trade tensions would lead the world economy into a recession that Morgan Stanley analysts said in a note Fed could lower the rates down to zero by mid-2020. While weak data and signals of an economic slowdown in the US cause concerns, New York Fed’s business sentiment index hit record low in more than two years in May which signaled economic activity contracted in the region.
While gold has been supported by disputes in trade and geopolitical relations, yellow metal recovered from recent fall by finding support from weakening dollar today ahead of Fed’s policy meeting.
As of 15:18 GMT+3, spot gold was trading at $1,350.41 an ounce while dollar index recovered and rose to 97.68 after ECB President Mario Draghi signalled monetary policy easing. US 10-year Treasury yield was down to 2.025.
Argonaut Securities analyst Helen Lau said on Reuters that sentiment for gold was positive while adding dollar weakened with rate cut expectations and this was the reason which supported gold prices.
New York Fed said yesterday that business sentiment in the state decreased to the lowest level for more than 2 years and signalled economic activity contracted in May. Index was down to -8.6% from 17.8% in May. The weak reading was stated to be due to weak employment and decreasing new orders while Michael Englung, chief economist at Action Economics, said in a note that effects of trade dispute and financial market setbacks were likely be seen and this fall would be problematic if it was supported by other sentiment reports for June.
While expectations on a rate cut by Fed increased due to trade war, economic slowdown in the US and US President Donald Trump’s criticism against the central bank, Fed will unlikely to cut the rates after its two-day meeting starting today however some expects there could be a dovish sign that would increase bets for a rate cut in July.
INTL FCStone analyst Edward Meir said in a note that Fed would be less dovish than market expectations and thus dollar would be stronger which could weigh on gold prices.
In the meantime, Morgan Stanley analysts said in a note that if trade relations between the US and China continued to deteriorate and US economy was to be in a recession, Fed would cut the rates down to zero by mid-2020. Bank’s chief equity analyst Michael Wilson had said yesterday that risks increased due to deteriorating data.