All eyes are on gold’s long-term support as markets see the likelihood of the Federal Reserve raising interest rates by 1% next week.

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(Kitco News) – Inflation has proven significantly more persistent than initially expected as lower energy prices provide little comfort to consumers who continue to see steep rises in shelter and food costs.

The persistent inflation threat is creating more volatility in interest rate expectations as markets see the potential for the Federal Reserve to become increasingly more aggressive over the rest of the year. A more aggressive central bank can have a huge impact He wentwith prices hovering above a critical long-term support level.

Interest rate expectations have jumped since Tuesday after markets were surprised by a higher-than-expected 8.3% rise in consumer inflation in August.

According to the CME FedWatch tool, markets are now pricing in a more than 30% chance that the Federal Reserve will raise interest rates by the full 1%. Last week, investors were still debating whether the US central bank would raise the federal funds rate by 50 or 75 basis points.

“Inflation data shows that the Fed is well behind the curve, so there is a very good chance the Fed will move 1% next week to show markets that it is taking inflation seriously,” said Colin Chinsky, chief market strategist at SIA. Wealth management. “The data shows that inflation is not just a rise in prices on a few commodities, but has become widespread, which is the Fed’s biggest concern.”

Increasingly hawkish expectations do not bode well He went. The precious metal fell more than 1% to retest support at $1,700 an ounce after higher-than-expected CPI numbers on Tuesday. December gold futures are still under pressure, as they were recently traded at $1,712.50 an ounce, down 0.28% on the day.

Analysts note that higher interest rate expectations may point to further weakness for gold as it hovers above a critical long-term support level.

Jim Wyckoff, chief technical analyst at Kitco.com, said: “Bulls need to defend $1,686.30 in October gold futures, which is the lowest level in the summer. A fall below this level would seriously damage the chart and lead to Selling stopped sending prices significantly lower.”

Cieszynski said he is watching support between $1,680 and $1,675. He added that if this support area were to break, there would be little to prevent prices from falling all the way to $1,550 an ounce.

Several analysts have noted that a break below $1,675 would signal the end of a three-year gold bull market.

Unfortunately, for gold investors, interest rate concerns go far beyond just one rate hike. Lukman Otunuga, director of market analysis at FXTM, said that markets practically priced a 75 basis point increase in November. Meanwhile, markets see a final interest rate of 5% by March.

“This will only add to He wentWoes as the precious metal loses its luster in a high interest rate environment. And speaking of technical indicators, $1,700 remains a key level of interest as the path of least resistance points south.”

despite He wentThe outlook is bleak, with some analysts saying that other factors could play a role in supporting prices. Several economists have pointed to the growing risk of a sovereign debt crisis among emerging market countries as the US dollar remains at a 20-year high.



Meanwhile, some analysts said a 1% move could be interpreted as a panic move by the Fed, which would be positive for gold as markets may lose confidence in the central bank.

This was said by Nikki Shiels, Head of Metals Strategy at MKS He went They can hold $1,700 in the face of rising interest rates because investors are reluctant to part with an important safe-haven asset. She added that there are concerns that the Federal Reserve will continue to raise interest rates until something collapses in the global economy.

Ole Hansen, head of commodity strategy at Saxo Bank, said he expects gold prices to hold $1,700; Much depends, however, on the United States, which is stabilizing near a 20-year high.

“Rising 1% next week will bring us closer to the economic edge that may ultimately be positive for gold,” he said. “The dollar is likely to stay strong and gold weak until something breaks on the economic front. Until that time gold may suffer, but I’m still a bull because I think the market is wrong in their assumption that inflation will return to 3%.”

Andrew Hunter, chief US economist at Capital Economics, said in a report Wednesday that he still expects the Federal Reserve to raise interest rates by 75 basis points next week.

“The FOMC’s new forecast is likely to indicate that the end of the tightening cycle is about to emerge, and we continue to expect a sharp drop in inflation to eventually persuade officials to cut rates in the second half of next year,” he said. .

However, Capital Economics is not optimistic about gold prices this year as it expects higher interest rates and a strong US dollar to push prices to $1,650 an ounce by the end of the year.

The British research firm is a bit more bullish about gold in the second half of 2023 as it sees interest rates lower.

Disclaimer: The opinions expressed in this article are those of the author and may not reflect the views of Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; However, Kitco Metals Inc. cannot. Nor does the author guarantee this accuracy. This article is for informational purposes only. It is not a solicitation to conduct any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. does not accept The author of this article will be liable for losses and/or damages arising from the use of this publication.