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Gold came fully armed to the US Federal Reserve meeting. Investors are confident that the central bank will lower the federal funds rate by 25 bp and are also expecting to receive an answer from Jerome Powell to the question whether the Fed will limit itself to one act of monetary expansion or start its cycle. In the first case, the US dollar will receive an excellent opportunity for growth, in the second it will be sold off. Given the close correlation of the precious metal with the US currency, one should expect a violent reaction from XAU/USD to the results of the FOMC meeting.
According to Commerzbank, a serious correction will not happen even if gold subsides due to the Fed's unwillingness to give the market what it expects. The bank recommends using the fall in XAU/USD quotes for purchases and nods at the background that is favorable for the precious metal. Indeed, the conflict in the Middle East, Brexit and uncertainty in the trade negotiations between the US and China have brought the political risk index back to the area of multi-year highs. Iran threatens to block the Strait of Hormuz, new British Prime Minister Boris Johnson is ready to deliver an ultimatum to the EU, and Donald Trump is aggravating the situation during the negotiations of the US delegation in Shanghai. According to the owner of the White House, the Chinese are not fulfilling their obligations to increase purchases of agricultural products in the United States. They say one thing, but they do something completely different.
Global Political Risk Index Dynamics
According to one of the best forecasters of Bloomberg for gold, Societe Generale, the precious metal will grow as the probability of a recession in the United States increases. The indicator from the Federal Reserve Bank of New York shows that the chances of a downturn in the US economy over the next 12 months have risen to their highest since 2008. Societe Generale notes that the end of the economic cycle will lead to a weaker US dollar, which is good news for XAU/USD bulls. Speculators are increasing their long positions, while ETF fans have increased their stocks of specialized exchange funds to 2,350.1 tons, the highest level since April 2013.
Dynamics of gold and speculative positions
The White House's criticism over the Fed provides support to the precious metal. According to Donald Trump, the central bank is obliged to lower the federal funds rate from 2.5% to 1.5% and stop the balance reduction process. Jerome Powell and his colleagues acted incorrectly, tightening monetary policy too quickly. It's time to get back on track. Despite the fact that the Fed does not depend on the president, the wishes of the latter come to life: at the end of 2018 Trump spoke of the need to halt the process of monetary tightening, and the Fed paused at the beginning of 2019. Why did the turn of demands for a reduction in the federal funds rate come? The derivatives market is confident that it will fall by 25 bps in July and September.
Technically, the bears' inability to bring gold quotes to support at $1,408 and $1,402 per ounce was the first sign of their weakness. If the bulls manage to bring the precious metal beyond the upper limit of the red triangle, and then manage to rewrite the July high, the risks of implementing the target by by 161.8% according to the AB = CD pattern will increase.
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