A Shift in Mood Surrounding Fiscal Tightening Boosts Gold

A growing belief that the peak of the Federal Reserve’s restrictive monetary policy may be near, in conjunction with the slowdown of the US dollar, saw gold close last week rebounding from the recent lows at $1,620 and return above $1,650.

Investors are relatively sure that the Federal Reserve will hike rates by another 75 basis points next week, bringing them from 3.25 to 4.00%. But at the same time, there is rising optimism that this will be the last hike of this magnitude. In other words, the futures market is pricing in – according to CME Fedwatch Tool – over a 50% probability that in December’s FOMC meeting, rates will be increased by “only” 50 bps instead of 75 bps. That would leave interest rates at the end of 2022 at 4.50% (and not at 4.75%).

It seems clear that investor attention on gold remains high and a moderate correction of the greenback was enough to trigger a rebound in bullion. The next few days will see markets keenly awaiting the outcome of the Fed meeting and the release of subsequent US macroeconomic data.

Moreover, markets are closely following the political events unfolding in the UK. After Boris Johnson announced he would not be bidding to make a return to leading the party, former chancellor Rishi Sunak is expected to become the new Prime Minister. The pound reacted positively and is currently traded above 1.13 against the US Dollar and above 1.15 against the eurozone currency, while the EUR/USD is being exchanged in the region of 0.985.

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