Gold steady on Monday after having weekly loss last week while dollar gets stronger ahead of Fed’s interest rate decision due to be announced on Wednesday and weighs on yellow metal. Fed is expected to cut the rates by a quarter percentage point while half percentage point cut is highly unlikely as US data showed last Friday that the economy grew better than expected in the Q2. In the meantime, trade talks between the US and China will continue this week but with face-to-face meetings this time following phone talks between sides in the recent weeks, however it is likely that there won’t be any major progress. On macroeconomic indicator side, data released in China on Saturday showed industrial profits fell in June, signalling further weakness in already-slowing Chinese economy.
While gold prices keep steady on Monday amid being pressured by stronger dollar following better than expected US growth performance in the Q2, all eyes are on Fed’s interest rate decision due to be announced on Wednesday.
As of 15:00 GMT+3, spot gold was trading at $1,420.69 an ounce while dollar index was up to 98.11. US 10-year Treasury yield was down to 2.055.
Nirmal Bang Commodities head of research Kunal Shah said on Reuters that a dovish outlook would likely be seen in FOMC meeting this week and dollar would weaken which would be supportive for gold prices while National Securities chief market strategist Art Hogan said on Investing that they expected bad earnings and growth while both being above expectations would be priced by markets.
25 basis point rate cut is expected following Fed’s two-day meeting due to start tomorrow while hopes for a 50 basis point rate cut are mostly dashed after data released last Friday showed better than expected US growth performance in the Q2. As there are different approaches by Fed officials regarding why and how much the rates should be cut, door is expected to be left open for further cuts in policy statement alongside with 25 basis point cut on Wednesday however it is not sure whether this would reverse rate hike cycle which has taken place since 2015 because when we look at data released so far since Fed’s last meeting in June, labor market continued to keep tight, retails sales increased, consumer spending continued to support economic growth and growth in the Q2 slowed but was above expectations. By comparison, on the other hand, weakness in manufacturing sector, decreasing business investment and worse than expected personal consumption expenditures as well as tame inflation alongside with slowing Chinese and European economies and geopolitical risks such as no-deal Brexit are justifying the case for Fed to continue its rate cuts. That is why Fed’s communication language and decision of whether signalling further rate cuts on Wednesday will be as important as its interest rate decision.
In the meantime, first face-to-face meeting between US and Chinese officials following trade truce reached at G20 will take place in Shanghai this week. A major progress regarding a trade deal is not expected however sides will likely show goodwill to each other as China may decide to increase its US agricultural goods purchase and the US may lift ban on Huawei so that US companies will be able to sell equipments to the Chinese company. Since neither side has taken measures to show goodwill so far and statements from each side showed no sign of progress, hopes are dashed to reach a trade deal. US President Donald Trump had said last Friday that China might want to wait until US presidential elections in 2020 to sign a deal with the US.
Data released in China on Saturday showed industrial profits fell by 3.1% in June, reversing 1.1 profit growth in May. While weakness in industrial profits has been ongoing since mid-2018 in China where the economy has been hit by slowing global economy as well as trade war with the US, weakness in the economy is expected to persist even though government stimulus helped industrial companies to get a foothold.