Spot gold is expected to hit the biggest weekly line in the past seven weeks, FED must bridge a big gap

On Friday (October 15), spot gold fell back, but it is still expected to record its biggest gain in the past seven weeks, as the US dollar index fell from a high in more than a year this week, and may close down again after a lapse of five weeks. Traders turned their attention to when the Fed would start raising interest rates.


As of press time, the price of gold has risen by nearly 1.20% this week, with a turnover of more than $1,778 per ounce; the U.S. index this week hit the highest point of 94.563 since September 28 last year, but the weekly line may still fall by about 0.1%. Improved market sentiment has boosted global stock markets, commodity prices and bond yields, and has also put pressure on the safe-haven U.S. dollar.

The U.S. dollar has limited room to fall back

The U.S. dollar has risen sharply since the beginning of September, as the Fed is expected to tighten monetary policy faster than previously expected in the context of economic improvement and soaring energy prices. The minutes of the Fed’s September meeting released this week showed that policymakers hinted that it might begin to reduce support for the economy during the crisis in mid-November.

Previous policymakers considered the rise in inflation to be a "temporary phenomenon." However, as the economy recovers from the deep recession caused by the new crown epidemic, economic activity resumes with a rebound in animal prices, coupled with the impact of energy shortages and supply chain disruptions, and price hikes are everywhere, which actually indicates that inflation has risen more and more persistently than they expected .

The latest data shows that the US producer price index (PPI) rose 8.6% year-on-year in September, the largest year-on-year increase in the past 11 years. Data released on Wednesday showed that the US Consumer Price Index (CPI) rose 5.4% over the same period.

Kitco senior analyst Jim Wyckoff said: "Traders and investors finally realized that historically, no matter what the Fed does, rising inflation is good for gold." Wyckoff added that further stock market volatility this month may also trigger The safe-haven demand for gold.

The Fed must bridge the gap

However, the Fed’s decision-makers are still divided on how big the threat of high inflation is and how quickly interest rates need to be raised to deal with it. The September CPI and PPI reports also showed that the month-on-month increase has slowed, indicating that the price increase driven by the new crown epidemic may have peaked. The currency market currently believes that the probability of a 25 basis point increase in interest rates before July next year is 50%.

St. Louis Fed President Brad said in an online meeting on Thursday that the inflation trend is worrying. “Although I do believe that high inflation may naturally fade in the next six months, I will not say that there is sufficient justification. Let us count on it to happen." Brad added that he thinks the two possibilities each account for 50%.

In a speech at South Dakota State University Wednesday night, Fed Governor Bowman warned of inflation and worried that loose monetary policy is fueling high prices and possible asset bubbles. Bowman also urged that the pace of debt purchases be reduced next month.

Westpac strategists wrote in a client report: "The dollar index looks a bit volatile, but any decline should be moderate." They said that any decline in the dollar index should be limited to 93.70.

Different views of decision-makers

San Francisco Fed Chairman Daley is one of the Fed's most dovish policymakers. She told CNN International on Thursday that inflation has nothing to do with monetary policy at this time, and tightening policies is unlikely to have much effect on reducing inflation.

Daly said: “As long as the new crown epidemic is not over, prices will continue to rise because price increases are driven by supply chain bottlenecks caused by the pandemic interruption. Once the epidemic is over, inflation will subside. Now it is still talking about raising interest rates. It's too early." But she pointed out that the time has come when the Fed feels it can reduce its support for the economy.

In his speech at the New York Forecast Agency Club, Richmond Fed President Barkin made it clear that he is not yet convinced that high inflation will subside or that it will remain high. In his conversations with business leaders, he discovered that the focus on pricing in 2022 is not how much they can increase prices, but whether they can sustain the price increase this year.

Barkin said he is also not sure whether labor supply constraints will ease as more and more people return to the labor market, or many of the 5 million people who have left have returned to the labor market forever. "I'm not the kind of person who thinks it is necessary to make a statement on whether inflation is only a temporary phenomenon."

Ray Attrill, head of foreign exchange strategy at National Australia Bank (NAB), wrote in the report that although traders believe that there is a risk of early interest rate hikes, they also expect the terminal interest rate to fall. 1.97% fell to 1.63%, "The estimated decline in the US federal funds terminal interest rate may explain to a certain extent why the U.S. dollar fell slightly this week."

U.S. bipartisan disputes re-intensify

US President Biden signed legislation on Thursday to temporarily increase the government's borrowing limit to 28.9 trillion U.S. dollars and postpone the deadline for debt default until December. If the debt ceiling is not raised, the U.S. Treasury Department had estimated that it would have no money to pay national bills on October 18.

Biden's $480 billion loan limit increase is expected to be used up before December 3. Senate Republican leader McConnell sent a letter to Biden after voting in the Senate stating that he would no longer help Democrats to raise the debt ceiling.

Members of Congress face a series of important partisan struggles, involving Biden’s trillion-dollar Build Back Better bill, the $1 trillion infrastructure bill, and the deadline for raising the debt ceiling in early December.

Less than 13 months before the 2022 congressional elections, Republicans have increased their opposition to President Biden’s legislative agenda. Biden and his Democratic allies may face greater challenges in maintaining control of Congress. Risk aversion in financial markets is expected to lift gold prices.

Spot gold short-term look at $1810

On the hourly chart, the price of gold started an upward iii wave trend from US$1750 and broke the 76.4% target of US$1796. The market outlook is expected to further touch the 85.4% target of US$1801 and the 100% target of US$1810.