The Fed is expected to raise interest rates by 75 basis points this week

The European Central Bank raised interest rates for the first time since 2011, raising the three key interest rates by 50 basis points. In the United States, the CPI and PPI data in June have been "out of the table" one after another. In June, the CPI rose by 9.1% year-on-year, the largest increase since November 1981. The Fed's Bullard previously stated that he supports raising interest rates by 75 basis points at the July meeting, which can raise interest rates to a neutral level.

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The Fed is widely expected to raise rates by 75 basis points at the end of Wednesday's policy meeting. This would effectively end support for the economy during the pandemic. Gold edged higher, rising as much as 0.5% to around $1,728, helped by a weaker dollar, but was stuck in a tight range as investors were reluctant to take aggressive positions ahead of a possible U.S. rate hike.

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Some investors expect the Fed to continue raising interest rates by 75 basis points in July, raising the target range for the federal funds rate to 2.25-2.50%, thereby raising the policy rate to its neutral rate for the long-term. In our view, Fed Chairman Powell may want to retain his option, leaving room for a further 75bps rate hike. Although gold prices have some upside potential, from a position perspective, the average professional trader's gold holdings are still close to double their usual levels, which indicates that as the gold price falls, the entire market may experience huge shocks, which we have not seen yet. Gold bulls capitulated, meaning the recent rally could be swallowed up by another massive sell-off.

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Although gold prices have struggled in recent weeks, they have been encouraging in gold's traditionally seasonally low season, Suki Cooper, a precious metals analyst at Standard Chartered, said in a report released on Friday. Given the extent of the recent drop in gold prices, we think the gold market is also expecting a 75bps rate hike at the July meeting, and a 100bps rate hike would be a surprise and push prices below the key level of $1,690/oz. If the price of gold falls below this level, the price of gold will face substantial downside risks, and a 75 basis point hike in interest rates may stop the price of gold from falling and recover.

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Goldman Sachs believes that for the dollar to make a convincing turn, more news to calm inflation and a more balanced Fed policy may be needed. While some recent news on inflation has been encouraging, it will take some acknowledgment from Fed officials this week for a tactical dollar sell-off. While markets will again focus on rate hikes and September guidance at this meeting, it is more important to focus on the Fed's criteria for adjusting its policy. Goldman Sachs said this week's meeting will focus on whether officials will expand their standards to focus more on slowing economic activity data. Until this shift is clearer, markets will struggle to price in a more accommodative Fed stance and a weaker dollar.

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Ethan Harris, head of global research at Bank of America: Job creation is "too fast. That's why there hasn't been a real divide within the Fed. Unemployment is not in line with 2% inflation," they need to see some evidence That the unemployment rate is picking up," would be the reason to believe that inflation will continue to decline.

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Analysts believe that the Fed is expected to raise interest rates by 75 basis points this week. Gold retreated after posting its biggest weekly gain since May as investors weighed the prospect of a tightening Fed monetary policy and concerns about an economic slowdown. The former U.S. Treasury secretary has also expressed doubts about the possibility of a soft landing for the U.S. economy. Gold is headed for a fourth monthly decline as Fed tightening and a stronger dollar dent its appeal as a safe-haven asset, overshadowing concerns about inflation and a slowing economy. Investor appetite for gold waned, leading to a sixth straight weekly decline in gold-backed exchange-traded fund holdings, putting additional downward pressure on the metal.