Weaker stocks and lower bond yields over the past few months were not enough to shake gold out of its established range. What changed was the sudden acceleration in the market expectations for US rate cuts. This followed a batch of weak economic data from major economies and signs that the US-China trade war was moving towards a
new Cold War in tech. During the past two weeks, the market has doubled its rate cut expectations for the next 12 months from 0.5% to 1%.
This was the change that finally saw gold break higher and the question now is whether the renewed momentum is enough to carry gold higher. The is particularly relevant considering the Federal Open Market Committee led by chair Powell, at least for now, is not signaling a willingness to adopt the recent aggressive change in market expectations.
Yesterday in a speech at the Fed’s Chicago conference, Powell said the Fed was “closely monitoring” impact of trade developments and that it will “act as appropriate”.
On that basis and in order to maintain the current upside momentum in gold, market developments from here need to support the 1% gap between the current Fed Funds rate and the expected rate in 12 months’ time shown below. In the short term, this highlights the correction risk should economic data such as Friday’s US job report surprise to the strong side.
