The hint from the Fed that it has now concluded raising US interest rates has lifted Gold prices near record-high levels during the early hours of Thursday trade.
Gold buyers were hoping for a downbeat message from the Fed. Although it was not clear-cut, the US central bank did remove the narrative that it anticipates further rate increases would be required for the US economy. For Gold investors, this was seen as enough confirmation from the Fed that it is now done with raising US interest rates.
From the technical outlook side of the charts Gold is clearly bullish and buyers found a fresh round of inspiration after punching through $2000 at the beginning of the week. The precious metal should be a central function of an investor portfolio and for good reason. We all know that the momentum of world economic growth is slowing but questions remain unanswered regarding not how bad the slowdown will be, but how long the slowdown is likely to last.
Central banks have also raised interest rates at such an aggressive extent that the impact is going to take time to filter into economic data. We might not begin to see the impact until the second half of 2023. By that time, if inflationary pressures do ease, subsequent expectations will then emerge that central banks need to consider cutting interest rates.
This is seen as even more of a motivator to hold Gold in your portfolio, and investors are pricing in such possibilities as early as they can.
ECB to help the EURUSD advance above 1.10?
From the perspective of central banks, attention will now divert to Europe because the ECB is set to announce its latest interest rate decision today. The European Central Bank is expected to raise interest rates by 25 basis points, but there might be potential for a 50 basis point move. This would represent a hawkish surprise for Euro buyers.
The reason why I would not rule out the potential for a 50 basis point move even if I agree that it is ambitious to expect from a central bank that has a label as a conversative one, is because officials have recently stated that there remains a long way to go before the ECB can start to consider a pause in its rate hiking cycle.
The ECB is already well behind other central banks when it comes to the interest rate increase cycle that is taking place worldwide. It might want to push the pace faster and provide a more aggressive stance to avoid being left behind the pack later when the likes of the Fed signal that it could start lowering interest rates.
For once the ECB has actually got some momentum on its side. From the banking perspective at least, the situation is less precarious than that of the Fed. The United States witnessed three banks collapse in a matter of weeks. While the downfall of Credit Suisse in Europe will be remembered as historic, concerns over its future had been brewing for quite a while. Higher interest rates in Europe were not necessarily the catalyst for its demise.
Should we get an unexpected hawkish message coming out from the ECB later on, traders might receive a surprise gift. The interest rate differential trade pushing the Euro forward after what has essentially been a stronger rate differential towards the Dollar pinning the Euro down for years.
From the technical side of the charts, 1.10 in the Eurodollar is proving to be significant in terms of preventing a further advance. However, the moves in recent trading sessions in Gold provides hope that barriers are there to be broken.
NFP report Friday could bring upside surprise
Let us also not forget that while the various central bank meetings taking place this week are dominating attention, Friday will see the latest monthly employment report released by the United States.
The Non-Farm Payrolls report will show how many jobs the United States economy created in April. Expectations for a strong headline number have increased following the ADP employment report yesterday indicating that 296,000 jobs were added to the private sector. This suggests that we could be in line for an unforeseen blockbuster NFP data announcement Friday, with some optimists likely quietly hoping that the number of jobs added to the US economy overall in April might be above 300,000.
We should also remember that the correlation between the ADP employment change and the NFP jobs report is not always clear cut. There have been a few occasions in the past where the NFP headline number has not met the expectations suggested from the ADP data. Yet, an upside surprise from a potentially impressive monthly US jobs report tomorrow would suggest that the employment market still has scope to create further positions and validate the Federal Reserve’s stance to not yet give any clear indications on its future interest rate policy path.