Gold Price Forecast: Trade Tensions Limit Downside Potential

June 10, 2018 — 1:16 PM EDT

A relatively hawkish Federal Reserve statement is likely to underpin the dollar and undermine gold. There will be sharp gains in precious metals at times due to stresses in emerging markets and global trade tensions, although the best strategy looks to be selling rallies amid limited net losses.

Although volatility in other asset classes increased during the week, gold was confined to narrow ranges with little overall change for the week as contradictory factors canceled each other out. Overall, gold settled close to $1,300 per ounce, while there was no major shift in speculative positioning according to the latest CFTC data.

Global central bank policies will be a very important focus during the week, with all G3 banks holding their latest meetings. The U.S. Federal Reserve will announce its latest interest rate decision on Wednesday, with very strong expectations of a further 0.25% rate increase to a range of 1.75-2.00%. The rate decision itself should not have a major impact given that a hike is already priced in.

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The Federal Open market Committee (FOMC) will update its latest economic forecasts with projections of interest rates over the next three years. Markets will be looking whether the median is for one further increase over the second half of 2018 or whether the updated projection foresees two hikes. The statement will also be very important with a particular focus on inflation expectations and whether there are suggestions that underlying inflation pressures have increased significantly. The degree to which the FOMC is prepared to tolerate inflation being above the 2.0% target will also be crucial for dollar sentiment. Fed Chair Powell will also hold a press conference following the meeting.

Ahead of the Federal Reserve meeting, the latest CPI inflation data will be released on Tuesday, with the producer prices data on Tuesday. Retail sales data will also be released on Thursday, with expectations that tax cuts and a strong labor market will underpin spending. A hawkish Fed policy stance and strong CPI reading would be likely to trigger strong downward pressure on gold, while subdued readings would provide support. The most likely outcome is only mildly hawkish rhetoric given the desire to avoid market turbulence.

The European Central Bank will announce its latest policy decision on Thursday, and no change in interest rates is expected. Officials have, however, indicated that the quantitative easing program will be discussed, with the potential for announcing when bond buying will end. A hawkish statement would tend to increase bond yields and undermine gold, although the impact would potentially be offset by gains in EUR/USD. A dovish tone would have the reverse effect, with small net gold gains, and the bank overall is unlikely to be notably hawkish. Meanwhile, the Bank of japan is likely to make no changes to policy at Friday's policy meeting, although forward guidance could provide a jolt.

Global financial conditions will continue to be watched closely, with emerging markets again an important focus after sharp losses in the latest week. Further tensions would tend to support gold, with potential defensive support, especially if equity markets weaken further. Trade issues will remain important following the G7 Summit. Although leaders managed to compile a conciliatory statement, tensions immediately intensified again as President Trump withdrew his support after a row with Canadian Premier Trudeau.

Aggressive rhetoric from the U.S. and strong retaliatory measures from the EU would tend to undermine risk conditions and trigger some defensive gold demand. A more conciliatory tone and serious efforts to ease tensions by U.S. officials would tend to limit gold support. Developments surrounding U.S.-North Korean relations will also be significant, with the summit between President Trump and Kim Jong-un due to take place on June 12. A constructive tone would tend to undermine support for gold, while a quick breakdown in talks would tend to support gold.