Gold is showing limited movement on Tuesday. In the North American session, spot gold is trading at $1214.30 per ounce. In economic news, JOLTS Jobs Openings dropped sharply to 5.67 million, well below the forecast of 5.98 million. In the US, Federal Reserve Chair Janet Yellen will testify before the House Financial Services Committee.
Although gold is having a quiet week, that could change after Janet Yellen’s testimony before a congressional committee. Janet Yellen is sure to be questioned on whether the Fed is still expecting to raise rates in the second half of the year. Despite repeated statements from Fed policymakers that a rate hike is likely in December, the markets are not as confident, even with last week’s strong Nonfarm Payrolls report. A rate increase in September is very unlikely, with the odds pegged at just 13%, according to the CME Group. As for December, the likelihood of a rate hike is 50%, so the markets will need plenty of convincing that the Fed plans to make a move. Investors will remain lukewarm about the chances of a rate hike unless growth and inflation numbers improve. The US economy slowed down in the first quarter, with GDP rising just 1.4%. Currently, inflation is well below the Fed’s target of 2%, and although Janet Yellen recently stated that the factors weighing on inflation were temporary, investors aren’t convinced. Another factor that has entered the equation is the Federal Reserve’s balance sheet. The Fed has outlined plans to reduce its bloated balance sheet, but has avoided providing any specifics. If the Fed started to lower the balance sheet in September, such a move would mark a vote of confidence in the economy and raise speculation of a rate hike to follow in December.
Gold prices are inversely linked to interest rate hikes, so recent developments involving central banks (aside from the Fed, which continues to talk about a December rate hike) could have a significant impact on the metal. At the recent ECB forum, the heads of the ECB and Bank of England made hawkish statements about tightening monetary policy, and the euro and pound reacted with sharp gains. As well, the Bank of Canada has sent out messages that it will raise rates, and the markets are expecting a quarter-point hike on Wednesday, which would mark the first rate increase in two years. The trend towards tighter policy should not be a complete surprise, as the global economy has been improving in recent months. The ECB and BoE have yet to make any rate moves, but the fact that policymakers are deliberating over tightening policy could lead to expectations in the markets of rate hikes, which in turn would send gold prices lower.
