Gold futures are trading higher on Friday but pulling back from earlier highs. Nonetheless, the market is in a position to post a solid gain for the week. The rally is being fueled by a dip in U.S. Treasurys and a weaker U.S. Dollar. The catalyst behind the moves in the financial markets is renewed interest in a more aggressive interest rate cut by the U.S. Federal Reserve at its July 30-31 meeting.
At 11:46 GMT, August Comex gold is trading $1439.20, up $11.10 or +0.78%.
Also driving spot gold to a six-year high are an escalation of tensions in the Middle East after the U.S. Navy announced it had shot down an Iranian drone in the Strait of Hormuz. Meanwhile, Iran denied the incident, saying that all its drones had returned to base safely and there was no sign of major escalation in the Gulf.
Today’s rally in gold is a continuation of a late session surge from Thursday. That move was fueled by dovish comments from New York Federal Reserve President John Williams, who said that Fed policymakers could not wait for economic disaster to hit before reducing interest rates.
“It’s better to take preventative measures than to wait for disaster to unfold,” Williams said. He further added rather than keep rates elevated to give central banks room to cut in the face of a crisis, the proper move is not to “keep your powder dry.”
Williams didn’t actually say he would vote for a rate cut, but the response by gold investors indicates that his dovish tone means he’s leaning that way. It could also mean to some that the Fed may take the aggressive route and raise rates by a half-a-point.
Williams finished by saying that when faced with low rates and slowing growth, the best strategy is to “take swift action” and “keep interest rates lower for longer.”
“The expectation of lower interest rates in the future lowers yields on bonds and thereby fosters more favorable financial conditions overall. This will allow the stimulus to pick up steam, support economic growth over the medium term, and allow inflation to rise,” he said.
Williams’s comments are underpinning gold prices, but gains are being tempered after a spokesperson for the New York Federal Reserve told CNBC, “This was an academic speech on 20 years of research. It was not about potential policy actions at the upcoming FOMC meeting.”
Academic or not, Williams’s comments were perceived as bullish with investors now believing the Fed could make a more aggressive 50-basis point rate cut. After Williams’ delivered a speech at the annual meeting of the Central Bank Research Association, market expectations for a half a point rate cut leaped to about 59%, according to the CME’s Fedwatch tool. Prior to his speech, predictions for a 50-basis point rate cut had hovered between 20% and 30%.
Later, Fed Vice Chair Richard Clarida said on Fox Business that cutting interest rates quickly is a good strategy. Market expectations for a half-a-point cut surged even higher to about 69%.
However, after the New York Fed spokesperson clarified Williams’s comments, expectations for a 50-basis point cut fell to about 50% around 23:00 GMT, and gold retreated from its intraday high.
In the reports category, investors will get the opportunity to react to the latest Preliminary University of Michigan Consumer Sentiment. It is expected to come in at 98.6, up slightly from the previously reported 98.2.
Traders should also look for a reaction from speeches by FOMC Member James Bullard at 15:05 GMT. He is likely to downplay a 50-basis point rate cut. FOMC Member Eric Rosengren is scheduled to speak at 20:30 GMT.
This article was originally posted on FX Empire
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