Gold prices continue to fall, dragged down by high inflation and accelerated interest rate hikes

The number of U.S. states filing for unemployment insurance rose for a third straight week to the highest level since November, as more companies announced layoffs, signaling some weakness in an otherwise solid job market. Initial jobless claims rose 7,000 to 251,000 for the week ended July 16.

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Dragged down by the prospect of accelerated rate hikes by the world's major central banks in response to high inflation. The international gold price fell to a new low of $1,685.17 per ounce since early August 2021, but despite this, fears of an economic recession still exist. If the pace of rate hikes is too rapid, traders should brace for a potential change in the market.

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The European Central Bank raised interest rates by 50 basis points and launched the anti-crisis tool TPI. At the same time, it emphasized that raising interest rates by 50 basis points was based on an assessment of inflation risks and was supported by the TPI tool; the European Central Bank today described this move as a preemptive action, But at the same time stressed that the policy normalization actions will be assessed on a meeting-by-meeting basis. The absence of forward guidance for September could raise hopes for a 75bps rate hike in September, especially after today's unexpectedly sharp hike.​​

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Traders expect the ECB to raise rates by 60 basis points at its next meeting in September, compared with less than 50 basis points expected ahead of today's decision. The repricing suggests investors expect the ECB will have to take more aggressive steps to tackle record inflation. Inflation in Europe is currently more than four times the 2% target.

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The ECB's move helped cement expectations for more aggressive rate hikes elsewhere in Europe. Investors now believe that a 50 basis point rate hike by the Bank of England next month is almost a certainty. It would be the largest rate hike by the Bank of England since it set monetary policy independently in 1997. Traders expect the Bank of England to raise rates by about 48 basis points on Aug. 4, up from 45 basis points previously. With markets still grumbling over the BoE's failure to raise rates last November, this represents a sizable bet that the Bank of England is about to follow suit with a 50 basis point hike.

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The odds of the U.S. entering a recession have risen as IT giant Google halted its hiring process over the past two weeks. The catalyst that prompted the central bank to tighten policy without hesitation was a tight labor market. Now, the market is expecting layoffs at Google in the coming quarters, also signaling that U.S. jobs are dwindling. The U.S. economy faces the twin effects of a weak labor market and rising inflation.

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The Fed is widely expected to raise interest rates by 75 basis points at its policy meeting next week. In the UK, inflation soared to a 40-year high in June, raising the odds that the Bank of England will raise interest rates by 0.5 percentage points next month.

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"It's clear that inflation expectations are fading, as the Fed and other major central banks are implementing aggressive tightening, which erodes gold's appeal," said DailyFX FX strategist Ilya Spivak.