Gold And The Fed Decision: When A Week Feels Too Long

July 23, 2019

New York (July 23)  A week sometimes feels too long in markets. And few can relate better to this now than those long in gold.

Gold longs are eagerly anticipating their first U.S. rate cut in over a decade since the financial crisis. But they have to endure at least another week before knowing if the Federal Reserve will grant that wish. What makes the wait more nail-biting is the Fed’s moratorium on any rate-sensitive information between now and its July 31 monetary policy decision.

With just about a week to the central bank’s monthly policy update, Fed officials are avoiding public speeches and interviews that could heighten market speculation of their intent. That leaves investors without fresh input on policymakers’ outlook for rates or stimulus. And it’s not just the Fed that’s doing this, but also the European Central Bank, which has its own policy update—and a potential rate cut—to announce on July 25.

Fed, ECB ‘Blackout’ Heightens Wait-Out Drama For Gold Longs

After weeks of dropping cues and hints on where interest rates might go, the world’s top two central banks are suddenly off the air. The information “blackout” practically leaves gold investors who plowed headlong into the market over the past month—on suggestions of imminent rate cuts—to figure out trades on their own until the chips fall where they may.

The good news for such gold bulls is they may not have to wait out an entire week to discover the Fed’s game. A U.S. rate cut is almost certain if the ECB executes its own easing on Thursday. Market odds for an ECB cut surpassed 50% last week, with a reduction of 10 basis points on the card. Smaller central banks in South Korea and South Africa already cut rates last week.

Most interest rates traders expect a Fed reduction of 25 basis points on July 31. That would put the federal funds rate at 2%, from 2.25%. Another 25-bp cut has been priced for the Fed’s September meeting.

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