Gold would stay afloat amid talks about stagflation and expectations of the ECB’s monetary restriction start. Alas! Christine Lagarde did not live up to those expectations, and a “soft landing” of the US economy is still possible. Let’s see how it will affect the XAUUSD and make a trading plan.
Weekly fundamental forecast for gold
Don’t rake over coals! Few manage, though. Especially when it comes to traders that simply have to look back on the past. Especially if the past often rings a bell. The World Bank asserts that the global economy is heading to stagflation — a combination of slow GDP growth and high inflation pressure. The stagflation that big has not allegedly been recorded since the 70ies. Back then, gold was a king. Its cost grew 4.3 times from summer 1976 to spring 1980. Now the precious metal has fallen into a black body after two failures to break above $2,000 per ounce.
So, everyone is drawing historical parallels with the events that happened more than 40 years ago. The same high inflation, the Fed’s aggressive monetary tightening, and a similar energy crisis. The main difference is that the US was a net importer of oil in the 1970ies, and a surge in Brent prices was negative news for the US economy and the US dollar. The USD index fell almost 20% from summer 1976 to spring 1980 and thus pushed gold up. These days, the US sells oil, and the US dollar’s position near 20-year peaks disturbs the XAUUSD bulls.
The greenback’s positions look solid, indeed. The derivatives market and Reuters are sure that the Fed will raise the federal funds rate by 50 bps in June and July. Most experts believe there will be no pause at the end of Q3. Fifty-nine out of eighty-five respondents predict a 25 bp rise in borrowing costs in September. Twenty-three respondents expect a 50 bp rise. Around 60% of economists believe the Central bank will make a pause no earlier than Q1 or Q2 of 2023. The consensus estimate is that the rate will grow to 2.75% by the end of 2022, which is lower than an expected value of 3%.
Fed rate, US inflation, and US GDP forecasts
If borrowing costs increase at each of the FOMC’s meetings, the treasury yield will rally. As a result, real bond rates will grow, and the greenback will get stronger amid the US inflation’s step-by-step slowdown. That’s an explosive and extremely negative situation for gold, even more so when other central banks follow the Fed. Nearly 60 regulators are raising rates, which increases global yields.
Tightening monetary policy too aggressively, the Fed will provoke a hard landing of the US economy. A drastic slowdown in employment or inflation growth will signal an approaching recession. That’s the only thing that could save gold from a further downtrend. Until then, Jerome Powell and his colleagues will continue raising rates.
Weekly trading plan for gold
A modest decrease in the US core inflation from 6.2% to 5.9% in May is not a reason for selling the dollar. On the contrary, the markets will ascertain there will not be a monetary restriction pause in September. We could then build up shorts opened at $1860 per ounce once the price breaks below support at $1835.
Price chart of XAUUSD in real time mode
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