Gold Stages 11th-Hour Rally Before Highly-Anticipated Rate Cut

© Reuters.

By Barani Krishnan

Investing.com – The gold rush ahead of the much-anticipated Federal Reserve rate cut is ringing the tills at the 11th hour for bugs of the yellow metal.

Gold prices rose for a fourth-consecutive session on Tuesday as international bond yields continued to fall in response to weak Japanese and European data, before the close of the Fed's two-day policy meeting.

Spot gold, reflective of trades in bullion, traded at $1,430.66 per ounce by 2:35 PM ET (18:35 GMT), up $3.75, or 0.3%, on the day.

Gold futures for August delivery, traded on the Comex division of the New York Mercantile Exchange, settled up $9.30, or 0.7%, at $1,429.70. It hit a five-day high of $1,433.19 earlier in the session. Gold futures for December delivery, Comex’s designated front-month after the expiry of the August contract, settled up $1.10 at $1,433.30.

With fed funds futures pricing odds of the 25 basis point cut at 100%, attention has shifted to just how much resistance the move will receive from within the Federal Open Market Committee.

Market expectations for an even larger 50-basis-point cut soared mid-month, but have since pulled back in light of a series of positive economic data, including a slowdown in U.S. economic growth that was not as bad as forecast. Following Wednesday’s expected cut, markets still project another reduction in September with chances for a third decrease in December above the 50% mark.

Those long the yellow metal have enjoyed an extended run on the notion that the Fed may do more than the quarter-point cut.

Non-yielding bullion, which benefits from lower rates, has been steadily climbing in the run-up to the expected announcement.

“Investors are wondering whether the Fed’s expected 25-basis-point rate cut would be enough to keep the markets supported given that some people have been calling for a deeper rate cut at this meeting,” said Fawad Razaqzada, analyst at FOREX.com in London.

“This comes on the back of disappointment that Mario Draghi, the European Central Bank president, was not as dovish as the market had expected last week,” he added

Joseph Brusuelas, chief economist at consultancy RSM US LLP, said in a morning note the Fed vote on rates could yield surprises.

“Given the sharp differences of opinion among committee members on the efficacy of a rate cut now as opposed to reserving as much monetary firepower as possible for when the current business cycle ends, there will likely be at least one dissenting voice," Brusuelas said.

Investing.com analyst Darrell Delamaide said that the Fed statement and Chairman Jerome Powell's press conference will overshadow the rate cut itself.

“The market reaction this week depends a lot on how the committee phrases its consensus message and most of all on how Powell explains the thinking of policymakers,” Delamaide said.

“If he continues to emphasize headwinds and risks to the economy, especially from trade tensions, investors can maintain their belief that further cuts are in store.”

In other central bank news, the Bank of Japan made no changes to interest rates in its decision announced overnight. Although it did revise its inflation forecast lower, it refrained from extending the duration of its promise to keep rates at extremely low levels beyond spring of 2020.

European economic data also supported risk-off behavior to the benefit of the precious metal as German consumer confidence worsened for a third-straight month in August and business confidence in the wider euro zone in July hit its lowest in nearly six years. German inflation also fell further and French gross domestic product growth slowed to 0.2% in the second quarter.

All of that, coupled with mounting fears of a disruptive no-deal Brexit, sent French and German bond yields back down to test their all-time lows. The German 10-year benchmark yielded -0.40% by mid-afternoon in Frankfurt, while the French counterpart yielded -0.14%.

U.S. personal income and spending for June were in line with expectations although inflation data, in the form of the core PCE price index, came out lower than expected.