Interest rate cut warm-up carnival? International gold prices hit new highs, how far can they go in the future?

On Monday, the international gold price rose sharply during the European trading session, rising by more than 1% during the session and once approaching the $2,130 mark, which is within striking distance of the historical high created last year. With the release of the Federal Reserve's most important inflation indicator last week, the market has become increasingly optimistic about the prospect of interest rate cuts in the first half of the year. The phenomenon of capital flight has not only appeared in commodities, but also in cryptocurrencies. Bitcoin broke through $67,000 intraday, setting a new high for the year.

This week, Federal Reserve Chairman Powell will appear in both houses of Congress and attend the semi-annual monetary policy hearings. The latest statements on the economic and monetary policy prospects are expected to have a significant impact on short-term gold prices.

Optimism boosts buying

International gold futures continued their good performance last Friday, closing up 1.2% at $2,122.42 per ounce, a new high since November last year. Investors further digested a series of benign economic data and looked ahead to a possible impending policy inflection point.

After the CPI and PPI reports in January unexpectedly exceeded expectations, another inflation report, the personal consumption expenditures price index (PCE), did not “scare” the market again. Although it accelerated month-on-month, the year-on-year growth rate hit a new low in nearly three years. , in line with market expectations. Meanwhile, consumer spending has slowed, held back by lower spending on goods including cars, furniture and other durable home equipment. The Consumer Confidence Index of the Conference Board for February was revised sharply downward, indicating that people are increasingly concerned about the uncertainty of the economic outlook.

Craig Erlam, senior market analyst at Oanda, said in an interview with China Business News that the U.S. economy has shown slight signs of cooling, and the inflation panic in January is unlikely to continue. There are some seasonal factors, so The market believes that the hope of interest rate cuts in the first half of the year has once again brightened, suppressing the U.S. dollar and U.S. bond yields and promoting capital inflows.

Federal funds rate futures show that traders expect the probability of the Federal Reserve to cut interest rates in June is close to 70%. In the past week, many Wall Street institutions, including Goldman Sachs and Morgan Stanley, and the World Bank have also predicted interest rate cuts to the end of the second quarter.

Bob Schwartz, senior economist at Oxford Economics, previously told China Business News that the Fed wants to be more convinced that the inflation rate is continuing to move towards 2% before cutting interest rates. At the same time, given the restrictive nature of monetary policy, we are also paying close attention to the impact on the economy. Compared with the Federal Interest Rate Committee (FOMC), which is more concerned about the risk of too rapid easing, he is more worried about the pressure of excessive policy. Schwartz analyzed that if the rate of interest rate cuts is slower than the rate at which inflation subsides, it will be equivalent to further tightening and may increase the risk of economic cooling. He is still optimistic that the Federal Reserve will start a new round of easing cycle in the first half of the year.

Central bank buying is also an important driver of the economy. Data from the World Gold Council shows that demand from central banks maintained growth momentum in the fourth quarter of last year, and global official gold reserves further increased by 229 tons. This lifted annual net demand to 1,037 tons, just below the record of 1,082 tons set in 2022, as reserve diversification and geopolitical concerns prompted central banks to increase allocations to safe assets.

Gold Newsletter's analysis of gold price trends in recent weeks found that strong demand in Asia, mainly China and India, coupled with continued buying by central banks of various countries, enabled the economy to withstand the previous short-term selling pressure. It should be noted that, with the exception of emerging markets, the pace of developed economies is significantly slower, and as the Federal Reserve enters an easing cycle, potential allocation needs in Western countries still exist.

Powell’s congressional speech attracts attention

This week, Powell will attend the first-half monetary policy report hearing. Previously published documents show that the Fed believes that inflation has slowed significantly recently, but is still above the target level of 2%. While labor demand has eased, the job market remains "relatively tight."

Investors hope that the Fed Chairman will reveal more clues about the policy path in his speech, especially information about the policy path. Recently, Fed officials have softened their stance on cutting interest rates. Although many still hold a cautious view, some members have said that summer may be an appropriate time for interest rate adjustments.

Erlam told China Business News that it is obviously too early for the Fed to declare victory. Judging from the recently released indicators, the challenges of housing rents and service industry inflation remain severe.

The hot job market has made it very slow to cool down inflation in core services. The tight labor supply has allowed companies to attract job seekers through salary increases and other means. This has further supported household consumption and has also become a factor in maintaining price pressure. As overall U.S. inflation gradually falls from a 40-year high to about 3%, the road to the "last mile" is getting bumpy.

This week the United States will release a number of employment data such as job vacancies, ADP employment and non-farm payrolls. Erlam believes that Powell will reiterate his data-dependent stance and wait for further signs of softening in the job market, while avoiding strengthening expectations on the easing issue and causing a recurrence of the anti-inflation process. Judging from the current situation, the U.S. economy seems to be moving toward the Fed's envisioned plan, and a soft landing also provides more room for policy choices.

Phillip Streible, chief market strategist at Blue Line Futures, said that in the short term, gold prices may easily break through record highs. "If Powell makes a more dovish speech this week, or if the non-farm payrolls data falls short of expectations, there will be a risk." Helps gold.”

UBS believes gold prices are expected to challenge $2,200 per ounce. Joni Teves, a strategist at the bank, said that although there is great uncertainty about the timing and extent of the Fed's interest rate cuts, the bottom line is that the market expects the Fed to ease policy and U.S. interest rates to fall. "Ongoing geopolitical tensions require asset diversification, and gold has always been one of the first choices in this regard. At the same time, the world's 4 billion people will usher in a total of 76 elections this year, and macro fluctuations may also be greater," the report said.