By Barani Krishnan
Investing.com – With just two days to the likelihood of the first U.S. interest rate cut in a decade, there’s just one way for gold to go – up.
Yet, gains in both bullion and gold futures were limited on Monday on concerns that the Federal Reserve may not do much in terms of easing right after a quarter-point reduction on Wednesday.
Spot gold, reflective of trades in bullion, traded at $1,423.17 per ounce by 2:15 PM ET (18:15 GMT), up $4.65, or 0.3%, on the day.
Gold futures for August delivery, traded on the Comex division of the New York Mercantile Exchange, settled up $1.10, or 0.01%, at $1,420.40.
Markets had sent odds soaring for a 50-basis-point cut in the middle of July, but a string of better-than-expected data, including last Friday’s release of second-quarter GDP, has dampened those hopes. Fed funds futures put the probability at just above 20%.
Markets currently expect a follow-through quarter-point reduction to occur in September, with more than a 50% chance of a third cut by the end of the year.
More important than what happens on Wednesday is what the market expects of the Fed in follow-through action in September and beyond. Here’s where the real disappointment could be for gold longs, as the Fed might not be as dovish as many expect.
Some analysts remained hopeful that Fed Chairman Jerome Powell could hold the keys to an extended rally in gold with what he personally says about monetary policy after the release of the central bank’s official statement on Wednesday.
“Considering that markets have already priced in a 25bp cut, we suspect that the focus will be on Powell's presser (new conference) which could still maintain a dovish tone given that global growth woes could continue to pressure the US economic engine,” TD Commodities said in its note on precious metals.
The Fed’s decision will likely overshadow other policy announcements this week by the Bank of Japan and the Bank of England, which are both expected to stay on hold.
The European Central Bank’s decision to hold last week gives the BoJ some breathing room amid a shift to a more dovish stance by central banks worldwide.
Without making a move, the BoJ may reinforce its commitment to keep interest rates at record lows, while the BoE may offer its assessment of the British economy's current downturn, and how it might respond in the event of a no-deal Brexit.
Gold bulls are also keeping an eye on high-level trade talks between the U.S. and China.
Expectations are low for any significant progress to be made and a continuation of the long-drawn out process could benefit safe-haven demand for gold.
Trade disputes have largely been attributed to slow global growth. Japan cut its growth forecast for this year due to weak exports, fruit of the Sino-U.S. trade conflict.
Japan's warning comes after the slowdown in the American economy, concerns expressed by European Central Bank President Mario Draghi that the prospects for the euro zone were getting “worse and worse” and the fact that the International Monetary Fund cut its own projection for global growth this year.